m 

'AyMm 




^■.vJwC'iVA'.V.".'.' ' ■ •/•.'.•i' ■'xV. .'■ ' '• • ' 




•mmi 








Rnnic .P4- ^ 



v^ 



//.% - ^ 



ELEMENTS 



POLITICAL ECONOMY. 



ARTHUR LATHAM PERRY, 

PROFESSOR OF HISTORY AND POLITICAL ECONOMY IN WILLIAMS 
COLLEGE. 




NEW^YORK: 
CHARLES SCRIBNER AND COMPANY. 

124 Graxd Street. 
1866. 



'PljS 



Entered according to Act of Congress, in the year 1865, by 

Arthur L. Perry, 

in the Clerk's Of&ce of the District Court of the United States for the District 

of Massachusetts. 



RIVERSIDE, oajvcbbisqe: 

STEREOTYPED AND PRINTED BT 

H. 0. HouaniON and company. 



To 

MY FRIEND AND COLLEAGUE, 

PROFESSOR JOHN BASCOM, 
arbis Book 

18 CORDIALLY INSCRIBED. 



TABLE OF CONTENTS. 



CHAPTER I. 

PAGE 

On the History of the Science 1 



CHAPTER II. 
On the Field of the Science 23 

CHAPTER III. 
On Value .33 

CHAPTER IV. 
On Exchange 74 

CHAPTER V. 
On Production 89 

CHAPTER VI. 
On Labor 103 

CHAPTER VII. 
On Capital 133 



VI CONTENTS. 

CHAPTEE VIII. 

PAQB 

On Land 149 

CHAPTER IX. 
On Cost of Pkoduction 166 

CHAPTER X. 
On Monet 188 

CHAPTER XI. 
On Cuekenot in the United States . . , . . . 277 

CHAPTER XII. 
On Credit 314 

CHAPTER XIII. 
On Foreign Trade 347 

CHAPTER XIV. 
On the Mercantile System . 410 

CHAPTER XV. 
On American Tariffs 422 

CHAPTER XVI. 
On Taxation 433 



ANALYSIS OF CHAPTERS. 



CHAPTER I. 

ON THE HISTORY OF THE SCIENCE. 

FAOB 

A. Definition of the science, 1 

B. Its Basis and mode of Development, .... 1 

C. Its History, 2 

a. Oriental ti-affic. Abraham 2 

6. Greek opinion. Xenophon, Plato, Aristotle. . 3 

c. Roman opinion. Cicero, Cato. .... 6 

d. Mddle-age opinion. The monks and universities, . 7 

e. The BulUon Theory, and the policy that sprung from it, 8 
/. The Mercantile System, and its devices, . . .11 
g. Recoil from the Mercantile System towards freedom, 15 

(1) English contributions. North, Hume, Smith, Ri- 

cardo. Mill 17 

(2) French contributions. Quesnay, Say, Bastiat. 19 

(3) Italian and German writers, .... 21 

(4) American contributions. Rae, Carey. . • 21 

CHAPTER 11. 

ON THE FIELD OF THE SCIENCE. 

A. Political Economy distinct from Moral Science, . . 23 

B. It is a political, that is, a social science, . . . .25 

a. Without society no exchange, .... 26 

b. Without exchange no value, 26 

c. Without value no science of value, ... 26 

d. Man in isolation weak, in society strong, . . .27 

C. Some leading definitions of the science, . • . < 28 



Viii ANALYSIS OF CHAPTERS. 

PAGE 

D. The word wealth useless as a scientific term, . . .29 
a. First reason of the slow progress of the science, . 29 

E. Archbishop Whately's definition, 31 

a. Second reason of slow progress, . . . . 31 

CHAPTER III. 

ON VALUE. 

A. Value not an independent quality of anything, . . 35 

B. But a relation of mutual purchase between two things, 35 

C. Origin of Value in an exchange of efforts, . . .37 

D. Desires, efforts, satisfactions, the circle of Political Econ- 

omy, . . . . . . . . . 37 

E. The simplest case of Value includes all others, . . 40 

F. No essential difference between services and commodities, 41 

G. This definition of Value final, with manifold advantages, 42 
a. It covers completely hitherto anomalous cases of value, 45 
J. Remarkable aptness of the word Service for a scientific 

use, 45 

c. Ultimate analysis of the phenomenon of Value, . 47 

d. The definition expands PoUtical Economy to its just 

limits, 48 

e. Frees the discussion from previous perplexities, . . 50 

(1) From the notion that value consists in matter, 51 

(2) From some obstinate illusions of language, . 54 

(3) From a mischievous confusion of utility with value, 55 
H. Value a different thing from Price, .... 59 

I. No perfect measure of value attainable, . . . .63 

J, Limitations of value in the two elements of efforts, . 64 
K. Limitations In the two elements of desires, . . .66 

L. Equation of Supply and Demand, .... 68 

M. Every rise or fall of demand tends to check Itself, . . 70 

a. Through a consequent rise or fall of value, . . 70 

1). Through action on sujDply, 7] 

N. Three classes of services in the law of their value, . 71 
a. Those which can be increased without increased diflS.- 

culty, 73 

h. Those Increased only through Increased difficulty, . 72 

o. Those which cannot be Increased at all, ... 72 



ANALYSIS OF CHAPTERS. IX 

CHAPTER IV. 

ON EXCHANGE. 

PAGE 

A. Principles of human nature involved in exchange, . 74 

B. Society a hive of buyers and sellers, . . . .75 

C. God's will as indicated in diversity of natural gifts, . 76 

D. Association and Individuality, . . . . .77 

E. Interest the sole motor in exchange, . . . . 77 

F. All exchange depends on diversity of relative advantage, 80 

G. The greater the difference of relative advantage the more 

profitable do exchanges become, .... 80 
H. Freedom, association, and invention, essential to just di- 
versity, 80 

I. The right to free exchange a natural right, . . .81 
J. Governments formerly unwarrantably interfered with this 

right, 81 

K. But latterly have mostly conceded it within home bound- 
aries, 83 

L. Opposed to free exchange are Monopolies, . . .84 
a. Arbitrary prohibitions on the sale of home services, 85 
6. Arbitrary prohibitory duties on the admission of for- 
eign services, ........ 85 

c. Patents and copyrights are unobjectionable monop- 

ohes, 87 

CHAPTER V. 

ON PRODUCTION. 

A. Definition of Production and Producers, ... 89 

B. The beneficent law of production this, that Nature works 

gratuitously in the service of man, .... 90 

C. The effect on values of Nature's help in production, . 93 

D. A general glut of products impossible, .... 95 

E. Advantages of the Division of Labor, ... 98 

a. Improved corporeal and intellectual dexterity, . 99 

b. The saving of time, 99 

c. The invention of machinery, 99 

d. The more economical distribution of labor, . . 100 



PAOT 


. 100 


100 


. 100 


101 


. 101 


101 


. 101 


101 


. 102 



X ANALYSIS OF CHAPTERS. 

e. A less waste of material, .... 
/. A saving in tools, .... 

F. Disadvantages of the Division of Labor, 
a. Monotonous work becomes irksome, 
&. A tendency to dwarf the powers, 
c. An undue dependence of the workmen, 

G. Limitations to the Division of Labor, . 
a. From the extent of the market, . 
1). From the nature of the employment, 

CHAPTER VI. 

ON LABOR. 

A. Physical labor consists in moving things, . . . 104 

B. Men have sought and found helps in this, . . . 104 

a. The domestic animals, 104 

b. The water-wheel and wind-mill, . . . .105 

c. Steam, 105 

C. To apply these capital is needed, 106 

D. The three requisites of material production, Labor, Power- 

agents, Capital, 106 

E. The definition of Labor, 106 

F. The remuneration of Labor, 107 

a. The wages of skilled labor depend : 

(1) On the general action of supply and demand, 108 
&. Are higher than the wages of common labor, . .108 

(1) From the scarcity of appropriate original gifts, 109 

(2) From the lack of the requisite industry, . 109 

(3) Or of the means of suitable education and train- 

ing, 109 

c. Principles varying all wages, mainly through supply, 110 

(1) Agreeableness or disagreeableness of the employ- 

ments, . - . . . . . 110 

(2) The easiness and cheapness of learning them, . Ill 

(3) The constancy of employment in them, . 113 

(4) The amount of trust involved, . , . .113 

(5) The probability of success, . . . . 115 

(6) Custom, prejudice, and fashion, . . . 116 

(7) Legal restrictions and voluntary associations, 117 



AI^ALYSIS OF CHAPTERS. XI 

PAQE 

d. Principles determining wages through demand, . 119 

(1) The presence of capital is a demand for labor, 119 

(2) The more of capital the stronger the demand, 119 

(3) Capital a dividend, number of laborers a divisor, 

and the quotient will express in general the 

rate of wages, 121 

e. Popular remedies for low wages ineffectual, . .122 

(1) Government can not directly raise them, • 123 

(2) But may indirectly act beneficially upon them, 124 

(3) Public opinion may act usefully in some direc- 

tions, ....... 125 

(4) No legal restraints on population needful, . 126 

(5) Strikes are false in theory and pernicious in 

practice, 128 

CHAPTER Vn. 

ON CAPITAL. 

A. Definition of Capital, 133 

B. How capital arises, 135 

C. The remuneration of Capital, or Profits, . . . 137 

a. Profits are the reward of abstinence, . . . 138 

b. And are just as legitimate as wages, . * . 139 

D. The law of distribution between Capital and Labor, . 141 
a. Labor is dii-ectly interested in the success of capital, 143 
6. Capitalequally interested in the prosperity of laborers, 143 

c. Increase of capital redounds more to the benefit of 

laborers as a class than to capitalists as a class, . 144 

E. Capital is either circulating or fixed, . . . 146 

CHAPTER Vin. 

ox LAND. 

A. The Talue of Land and the rent of Land not anomalous, 150 

B. The whole earth given to men gratuitously of God, . 150 
a. Till labor has been bestowed on them, or in reference 

to them, lands are valueless, . . . . 153 
6. What is sold in land is not the inherent qualities of 

the soil, but the improvements of man, . .153 



xii AlifALYSIS OF CHAPTERS. 

PAQE 

c. God's gifts to the race not interceptible by one gen- 

eration, 153 

d. History here confirms the deductions of reason, . 153 

C. Lands are subject to the law of diminishing return, . 155 

a. Through this law the whole earth has been gradually 

occupied, 156 

b. Mr. Carey fails to break down this law, . . . 157 

D. Diminishing returns retarded by improvements in agri- 

culture, 158 

E. Rent of land the measure of the service rendered by the 

owner, . . . . . ... . . 158 

a. Ricardo's theory too mechanical and rigid, . .159 

b. Rent partakes of the nature of both wages and profits, 160 

F. Approximately equal division of lands, and the tenure in 

fee simple, the best for production, . . . 161 

a. Beneficial operation of the fee simple, . . . 162 

b. Free trade in lands, and the consequent natural 

division best, 162 

(1) Because efficient motives are brought to bear 

more universally, ...... 163 

(2) Because there is more of personal supervision, 163 

(3) Because the masses are thereby educated and 

energized, 163 

(4) Because it contributes to the national strength, 163 

(5) Illustrations from England and France, . . 164 



CHAPTER IX. 

ON COST OP PROBTJCTION. 

A. Foresight an important matter in the sphere of ex- 

change, 167 

B. Cost of production one element from which value springs, 167 

C. Cost of production made up. of cost of labor and cost of 

capital, 170 

a. Cost of labor is made up of three things : 

(1) Efficiency of the labor, . . . . 170 

(2) The nominal rate of wages, . . . .170 

(3) The cost of that in which labor is paid, . 1 70 



ANALYSIS OF CHAPTERS. XUl 

PAGE 

b. Diversity of nominal wages does not prove a diver- 

sity in the cost of labor, . . . . .171 

c. The terms high and low wages ambiguous, . . 173 

(1) Meaning sometimes money wages, . . .173 

(2) Sometimes real wages, 173 

(3) Sometimes relative wages, . . . .173 

d. Profits the leavings of cost of labor, . . . 1 75 

e. Cost of capital analyzable into three variables, . 1 76 

(1) The rate per cent., 176 

(2) The time for which the capital is advanced, . 176 

(3) The slow or rapid deterioration of that fonai of 

capital, 176 

D. An enhanced cost of labor will exhibit itself in lower 

profits, 179 

E. A general and uniform rise or fall of wages will not 

aflfect value, 179 

F. A partial or unequal rise or fall will affect it, . .179 

G. The same, mutatis mutandis, is true of profits, . . 180 
H. The amount and durabilit)' of machinery an important 

element in cost of production, .... 180 

I. Machinery is not injurious to the wages of labor, . . 184 

a. Because labor is required to make, repair, and work it, 184 

b. Because it makes a broader market, and hence a 

stronger demand for products, . . . . 185 

c. Because it cheapens products used by the laborers, 185 
J. Manufactured articles tend to decline in' value as com- 
pared with food and raw materials, . . . .185 

CHAPTER X. 

ox MOXEY. 

A. Money was devised by men, and hence comprehensible by 

them, 188 

B. Barter is inconvenient, and sometimes impossible, . 189 

C. Money is a generalized purchasing-power, . . 192 

D. It is a medium of exchange, 193 

a. It is a small relative part of the values of any coun- 
try, 194 



xiv ANALYSIS OF CHAPTERS. 

PAGB 

J. Its first function is to help exchange those values, . 195 

c. It stimulates to exchanges which would not otherwise 

be made, 197 

d. It is a generalized form of capital, • . . .197 

e. The amount needed determined by its nature as a 

medium, ........ 198 

/. Kapidity of circulation important in this connection, 200 

E. Money is a measure of value, 201 

a. Importance of some units of measure in this field, 202 

b. Difi'erence between a medium and a measure, . 203 

c. Other tables of denominations fixed and absolute, . 204 

d. Money denominations variable, .... 206 

e. A measure should be as little as possible hable to 

fluctuation, ........ 208 

F. Gold and silver constitute the best money, . . 209 
a. On account of their comparatively steady value, . 210 
h. The reasons why their value is so steady, . . 212 

(1) On account of a comparatively steady demand, 212 

(2) On account of a tolerably uniform cost of pro- 

duction, 213 

(3) On account of their quantity, .... 214 

(4) On account of their fluency, . . . 216 

(5) Because every i-ise or fall of their value tends to 

check itself, 219 

(6) Because a temporarily increased demand is neatly 

met by increased rapidity of circulation, . 220 

c. They are the best money, secondly, because they are 

self-regulating, 221 

(1) Difficulty in a double standard, . . . 223 

(2) Possibility of a universal coinage, . . . 227 

d. Thirdly, because they are conveniently portable, 

divisible, and impressible, 233 

G. An inferior money drives a superior out, . . . 235 

a. Dutch illustration, 237 

6. English illustration, 239 

c. American illustrations, . , . . . 242 

H. A paper money is only tolerable when instantly con- 
vertible, 246 

a. A paper money is credit money, . . . .247 



ANALYSIS OF CHAPTERS. XV 

FAQB 

6. It cannot in its very nature well perform the func- 
tions of money, ...... 249 

c. The French assignats, 251 

d. American bills of credit, 254 

e. The legal-tender notes, ...... 255 

f. The State-bank currency, 257 

g. The currency of the new national banks, . .259 
h. The currency of the Bank of England, . . 261 

I. Gold and silver are an economical money, . . . 265 
J. Interest on money is legitimate, and its rate should be 

free, 266 

,a. Usury laws are anomalous, 266 

b. They are always disobeyed, 272 

c. It would be worse if they were obeyed, . . .273 



CHAPTER XI. 

ON CURRENCY IN THE UNITED STATES. 

A. The colonial currency, 278 

B. The continental currency, 280 

C. The Bank of North America, 284 

D. The first Bank of the United States, . . . .289 

E. The second Bank of the United States, . . . 292 

F. The State banks, 295 

G. The coins, 296 

H. The national banking system of 1863, .... 307 

CHAPTER XII. 

ON CREDIT. 

A. Credit is an exchange in which the return service is 

delayed, 314 

B. The forms of credit are various, ..... 315 

a. Book-accounts, 315 

6. Promissory-notes, 316 

(1) Those of individuals and corporations, . 317 

(2) Those of governments, 318 



xvi ANALYSIS OF CHAPTEES. 

PAGE 

c. Bills of exchange, 319 

(1) The par of exchange, 322 

(2) How restored by natural laws, . . . 323 

d. Checks, 325 

(1) The clearing-house system, .... 326 

C. The advantages of credit, 326 

a. In transferring capital from less to more productive 

hands, 326 

(1) To industrious men who have no capital, . .329 

(2) Through banks, 330 

(3) Through savings-banks, .... 330 

(4) Through life insurance companies, . . 330 
&. In economizing the general operations of exchange, 332 

D. The disadvantages of credit, 333 

a. " Long sales and large profits." " Quick sales and 

small profits," . . . , . . . . 334 

h. It tends to raise prices, 334 

E. The general cause of commercial crises, . . .337 

a. The crisis of 1837, 338 

I. The crisis of 1847, 342 

c. Thfe crisis of 1857, ...... 348 

CHAPTER Xm. 

ON FOREIGN TRADE. 

A. There are no principles peculiar to foreign trade, . 347 

B. But a separate treatment is needful, .... 347 

C. All exchange depends on diversity of relative advan- 

tage, 348 

D. National diversities are of God's ordination, . . . 350 

E. Relative cost of production — arithmetical illustration, 351 

F. The equation of international demand, . . . 359 

G. The word " compete " Irrelevant in this connecticJn, . 360 
H. EflFect on trade of enhanced facilities for production In 

either country, . . . . . . . 361 

I. The costs of carriage, 363 

a. Each nation does not necessarily pay its own, . 364 
6. That will depend upon the new International de- 
mand, 364 



ANALYSIS OF CHAPTERS. XVll 

PAGE 

J. Political Economy demands a free commerce, . . 366 

K. The old Mercantile System gave birth to restrictions, . 366 

L. Objections to free trade answered, . . . . 373 

a. A revenue tariff not opposed to free trade, . .373 

b. A theory? 373 

c. Does it diminish wages ? ...... 375 

d. Why so many men believe in restriction, . . 379 

e. Would manufactures suffer from freedom ? . . 381 
/. Would the country become purely agricultural ? . 384 
g. Is there any fundamental difference between com- 
merce and trade ? 388 

h. Mr. Bigelow's views, . . . . . .392 

i. Every nation ought to be independent, . . 402 

M. The voice of experience on free trade, . . . 404 

a. The English example, ...... 405 

6. The German example, 407 

CHAPTER XIV. 

ON THE MERCANTILE SYSTEM. 

A. Fundamental principles of the Mercantile System, . 410 

B. The national policy that sprung from it, . . .411 

a. Its first device, prohibitions, 414 

b. Its second device, restrictions for protection, . .417 

c. Its third device, bounties, ..... 420 

d. Its fourth device, colonies, . . . . .421 

CHAPTER XV. 

ON AMERICAN TARIFFS. 

A. England's policy towards the American Colonies, . 422 

a. The "Navigation Act," 423 

b. Prohibitions on manufactures, .... 425 

c. Considerations condemning the colonial policy, . 427 

B. Want of power to regulate commerce under the Con- 

federation, ........ 428 

C. The Tariff's under the Constitution, • . . . 429 
a. The "Hamilton Tariff" of 1789, . ... 429 

(1) Its low duties, 429 

b 



xviii ANALYSIS OF CHAPTERS. 

PAOX 

(2) Its steady revenue, 430 

(3) Its principles of tonnage and protection, . . 431. 

b. The "Calhoun Tariff" of 1816, . ... 431 

(1) Unfortunate connection of tariffs with politics, 432 

(2) The restrictive system fairly entered upon, . 432 

c. The "Clay Tariff" of 1824, 432 

(1) Higher duties, 433 

(2) Pi'otected interests not satisfied, . . . 433 
d The "Tariff of abominations" of 1828, . . 433 

(1) Protection had become unpopular, . . . 433 

(2) Daniel Webster first votes for protection, . 433 
e. The " Compromise Tariff" of 1833, • . .434 

(1) Presidential canvass hostile to protection, . 434 

(2) The sliding scale of lower duties, . . . 434 
/. The "Whig Tariff" of 1842, .... 434 

(1) Average of duties about fifty per cent., . . 434 

(2) Factitious character of the industry stimulated, 434 
g. The " Walker Tariff" of 1846, .... 435 

435 
435 
435 
435 
435 
436 
436 
436 
437 
437 



(1) Low duties, but discrimination, 

(2) Increase of revenue, .... 
h. The "Tariff of 1857," 

(1) Lower duties, and increase of free list, 

(2) Falling off, and rallying of revenue, 
l The "Morrill Tariff" of 1861, . 

(1) Duties too high and complicated, 

(2) Free list too large, and not honestly framed, 

(3) Revenue too small, 

(4) It can not be permanent, 

CHAPTER XVL 

ON TAXATION. 

A. Taxation legitimate on principles of exchange, . . 438 

B. The Right of Property is the power to render services, 438 

C. Taxes, then, fall properly on exchanges, . . . 439 

D. And should be proportionate to them, .... 441 

E. Taxes are either direct or indirect, .... 443 

a. Direct taxes fell on income or expenditure, . . 444 

b. Indirect on imports or services in transition, . 444 



ANALYSIS OF CHAPTERS. xix 

PAGE 

c. An income tax unexceptionable in principle, . . 444 

d. Taxes on expenditures, special, and hence objection- 

able, 445 

e. A house-tax, however, less so, 445 

/. General advantages and disadvantages of each form, 446 

F. Taxes and duties, to be productive should be low, . 446 

G. Taxes and duties should be simple, . . . .447 
H. They should be collected only just before disbursement, 448 

I. Poorer citizens should be mostly or wholly exempted 

from taxes, , 449 



ELEMENTS OF POLITICAL ECONOMY. 



CHAPTER I. 

HISTORY OF THE SCIENCE. 

Political Economy is the science of exchanges, 
or, what is exactly equivalent, the science of value. 
To unfold this science in an orderly manner will 
require an analysis of those principles of human 
nature out of which exchanges spring ; an examina- 
tion of the providential arrangements, physical and 
social, by which it appears that exchanges were 
designed by God for the welfare of man ; and an 
inquiry into those laws and usages devised by men 
to facilitate or to impede exchanges. The science 
of value will be soundly based and properly unfolded 
when its propositions systematically arranged are 
shown to be deducible from acknowledged principles 
of human nature, and consonant with the providen- 
tial structure of the world and of society ; and when, 
in the light of these propositions, human institutions 
and laws relating to exchanges are explained and 
correctly estimated. An attempt to base and to 
develop the science of value thus will be made in 
the following pages ; but before that work is fairly 
entered upon, it will be well to take a preliminary 
1 



2 ELEJIENTS OF POLITICAL ECONOMY. 

glance at the history of the science, and to trace the 
steps by which successive inquirers have brought 
Political Economy to its present stage of develop- 
ment. 

While labor is as old as the race, and exchanges 
are as old as society, and while doubtless in all ages 
individual inquirers have tasked their minds with 
some portions of the subject. Political Economy as a 
science can hardly be said to have existed till within 
a period comparatively recent. Men exchanged 
among themselves services and commodities, and 
found their account in exchanging, long before the 
dawn of authentic history. The first commercial 
transaction on record dates back about two thousand 
years before Christ, p was the purchase by Abra- 
ham of the cave and field of Machpelah. "And 
Abraham weighed to Ephron the silver which he had 
named in the audience of the sons of Heth, four hun- 
dred shekels of silver, current money with the mer- 
chant." All this implies at that early day fixed con- 
ditions of trade. There were merchants as a class. 
Silver by weight was already a medium of exchange 
passing from hand to hand. It was current money 
with the merchant. In the absence of written doc- 
uments a bargain was made in the presence of living 
witnesses. It was " in the audience of the sons of 
Heth, before all that went in at the gate of his city, 
that the field and the cave were made sure unto 
Abraham for a possession." An earlier passage in 
the life of Abraham shows that gold as well as silver 
was already reckoned an article of merchandise. It 
is said that Abraham departed from Egypt " very 
rich in cattle, in silver and gold." 



HISTORY OF THE SCIENCE. 3 

From Abraham's time to the present, traffic has 
employed a portion of the activity of every people 
not utterly savage. Nineveh " multiplied her mer- 
chants above the stars of heaven." Tyre became 
"the royal exchange of the world." Athens, Car- 
thage, Alexandria, Venice, Amsterdam, London, and 
New York, have each in turn not only engaged in 
domestic exchanges, but also " have ploughed the 
deep and reaped the harvests of every land ! " 

The earliest writer known to us who treated econo- 
mic subjects at any length is Xenophon. In the first 
half of the fourth century before Christ this accom- 
plished Athenian published two tracts, one " On the 
Revenues of Athens," and the other entitled " The 
Economist." These earliest essays, not indeed on 
Political Economy, but on some of the subjects with 
which that science has to do, contain, together with 
much that is fallacious, some sound and liberal prin- 
ciples. In the first of them Xenophon attempts to 
point out the modes in which the internal resources 
of Athens, if properly developed, might be made 
sufficient to balance her expenditures without the 
imposition of burdensome taxes. He dwells on the 
abundance of her natural productions, especially her 
mineral wealth, and her advantages as an emporium 
of trade. He suggests various ameliorations in the 
condition of the laboring classes. He would promote 
commerce, and augment the income from duties by 
holding out inducements to foreign ships to frequent 
the ports of Athens, by a more honorable treatment 
of merchants, by enlarging the public marts and 
warehouses, and by otherwise facilitating the trans- 
action of mercantile business. He recommends that 



4 ELEMENTS OF POLITICAL ECONOMY. 

the government as such should itself undertake com- 
mercial enterprises ; and especially urges that the 
silver mines of Laurium should be worked on gov- 
ernment account and on a better system, admitting 
however private persons to a share in the capital 
stock and its returns. In conclusion he dwells on 
the importance of a durable peace to the success of 
every measure of national improvement. In the 
other little book referred to, there is a discussion on 
the origin, nature, and value of property ; a view of 
the various parts of domestic economy ; and a pretty 
full treatment of the subject of agriculture.^ 

There is nothing else on economical topics in the 
whole range of Greek literature that approximates 
in liberality and soundness to these little works of 
Xenophon. Plato, in his book called the " Republic," 
correctly sketches one important principle of the sci- 
ence, namely, the necessity man is in, from his mul- 
tifarious wants, of uniting in extensive societies, in 
which each individual may be occupied exclusively 
with one species of production ; but this speculative 
view is so far from being carried out to its practical 
application, that he proposes to banish entirely arti- 
sans and merchants from his imaginary common- 
wealth. Aristotle, however, has sometimes been called 
the father of Political Economy. He was not the 
father of the thing, but only of the name. He was 
the first to employ the expression which has ever 
since been used to designate the science. He wrote 
a treatise entitled " Economics," on the relation of 
man towards property ; in which he lays down the 
doctrine that the bounty of nature is the only true 

1 Mure's History of the Greek Literature. 



HISTORY OF THE SCIENCE. 5 

source of wealth, and in which the current prejudices 
against trading and the interest of money are vehe- 
mently maintained. "Interest," he says, "is most 
reasonably detested." Aristotle, whatever his merits 
in other directions, can be regarded neither as the 
founder of, nor a very important contributor to, the 
science upon which he has the honor of confemng 
the name. 

We should expect beforehand that the more prac- 
tical Romans, lovers of law and order, and exhibiting 
to the world many of the high qualities of citizen 
life, would make some valuable contribution to the 
science of exchanges. In this we are disappointed. 
Though in the earlier and better days of Rome, agri- 
culture was highly esteemed, the blighting institution 
of slavery brought labor, the mechanical arts, and 
commerce more and more into disrepute. The lands 
were tilled by slaves. ^ Slaves became the artisans of 
the country." As always happens under such circum- 
stances, the freemen, the citizens, came to feel them- 
selves above such degrading occupations. It is 
pitiful to hear Cicero declaim against the noble rights 
of labor. In the De Officiis there is a whole para- 
graph of condemnation for those branches of manu- 
facturing and commercial industry which ought to 
be regarded not only as honorable but as the life and 
strength of the State. One sweep of his pen pushes 
out of the pale of respectability the whole class of 
mechanics. " All artisans are engaged in a degrading 
profession," says he. Again, " there can be nothing 
ingenuous in a workshop." Trade and commerce 
fare no better at his hands. When carried on on a 
small scale they are to be regarded ^s disgraceful ; 



6 ELEMENTS OF POLITICAL ECONOMY. 

when on a large scale they must not be greatly con- 
demned ! When social prejudices and views of labor 
like these are promulgated by the foremost man of 
his time, the best educated and the most liberal, there 
is no longer room for surprise at the lack of Roman 
contributions to Political Economy. 

Moreover, the Roman moralists regarded the accu- 
mulation of wealth as pernicious and subversive of 
those virtues in which they placed the perfection of 
character. Luxuries and refinements in the mode of 
living, which are the result of accumulation, found 
in them uncompromising foes. Old Cato, the censor, 
in his severe denunciations of wealth, was but a 
representative of the whole class of moralists. And 
this ought not to surprise us for two reasons. The 
stream of the Roman wealth, as it poured in, proved 
a curse and not a blessing, not because wealth is not 
a blessing, but because its waters instead of being 
diffused everywhere, falling like the rain, giving in- 
creased comforts to the poor, and adding to every 
man's enjoyment, rushed at once into a few huge 
reservoirs. There was no natural distribution. The 
source of the wealth too was as illegitimate as its 
consumption. It did not come from the peaceful 
and gradual development of the national resources. 
Instead of engaging in agriculture and raising grain 
or other products of land, instead of building mills 
and manufacturing useful articles, or by any other 
class of efforts producing something for exchange, it 
was the Roman method to conquer rich lands, and 
then subject the inhabitants to interminable tolls and 
taxes, and thus endeavor to grow rich from the spoils 
of the industry, of others. A comprehensive theory 



HISTORY OF THE SCIENCE. 7 

of value will hardly be reached, or be helped for- 
ward, in connection with such views of labor and 
such moral notions as the Romans entertained. 

During the Middle Ages, when most of the uni- 
versities of Europe were founded, the monopoly of 
knowledge was possessed by the Catholic clergy, and 
to them was naturally intrusted the regulation of the 
universities, and the establishing their courses of 
study. The course of study appointed was as mea- 
gre and scanty as the personal culture of the priests. 
If any one had suggested to those cadaverous and 
sometimes rope-begirded monks, that they should 
appoint a teacher to inquire into the nature of value, 
the laws of property, and the principles of commerce, 
they would have held up their hands in pious hoiTor! 
The prejudices against labor and manufactures and 
commerce were still strong. The monkish ideas that 
contact with the world, with its practical questions 
and concerns, was contaminating, was beneath the 
dignity of the scholar, and altogether unworthy of 
the Christian, was slow to loose its hold. But the 
world moves on. The time came when men got. a 
glimpse of the truth that the end of knowledge and 
science is a practical end, that their utility consists 
in their power to improve the condition of mankind, 
and that it is quite as worthy the attention of a 
rational human being to inquire how poverty may 
be prevented, the wants of the masses of mankind 
met, and the sum of human happiness increased, as 
to spend wearisome days and nights in following the 
intricacies of disputatious schoolmen, and arriving at 
last through mazes of metaphysical distinctions at 
results about as satisfactory as the schoolmen actu- 



8 ELEMENTS OF POLITICAL ECONOMY. 

ally reached after a long controversy in the case of 
the question, " In what consists personal identity? " 
or, more specifically, " What was it that made Peter 
Peter and not John, and John John and not Peter?" 
namely, " that John's identity consisted in his John- 
ity, and Peter's identity consisted in his Petricity or 
Peterness ! " 

In our survey thus far, bringing us down we will 
say to the year 1600, if we have found little positive 
light thrown as yet upon the science of value, we 
have at least discovered some of the reasons why 
such light could not be thrown. Absence of investi- 
gation and discussion however does not necessarily 
imply the lack of a theory. In truth, there was a 
theory of value which marks the whole period we 
have passed under review. This earliest general 
theory of value I shall venture to call the Bullion^ 
Theory. From the fact that gold and silver, owing 
merely to their convenience, came to be the money 
of all civilized nations, men fell into a curious mis- 
take in regard to them. They came to give to these 
metals a factitious importance, and to regard them 
as the real and only wealth. They overlooked the 
fact that these metals are a commodity, precisely like 
any other commodity, owe their value to labor, pre- 
cisely like any other commodity, and are bought and 
sold like any other commodity. With useful products 
of any kind one can always buy gold and silver. 
To trade is nothing but to barter one commodity for 
another, — to exchange corn for silver and silver for 
corn. Unless the trade is fraudulent, the one is 
equally valuable with the other ; and it would seem 
as if the simple consideration that men are willing to 



HISTORY OF THE SCIENCE. 9 

part, and do constantly part, with gold and silver to 
buy other things, would have been fatal to the prej- 
udice that the precious metals are the only wealth. 

There were however two things that seemed to 
sustain the Bullion theory. One was, that money is 
always the measure of value. " How much is it 
worth ? " The answer comes, so many dollars. Dol- 
lars are the denomination in which value is reckoned, 
just as degrees of the thermometer are the denomi- 
nation by which heat is measured. The difference 
between value itself and the measure of value — be- 
tween a bushel of wheat and that round measure by 
which we determine that there is a bushel — seems 
obvious enough ; but money has this peculiarity, it 
is not only a measure of value, but, so far as this 
expression is ever true of any one commodity, it has 
value in itself. There is no heat in a thermometer, 
and no wheat in a bushel-measure, but a dollar is not 
only a dollar measure, but a dollar value, and we can 
see how the fact that dollars both had value and were 
the measure of all other values, gave some plausibil- 
ity to the notion that the dollars were all. The other 
thing that made the Bullion theory plausible was the 
use of gold and silver as the universal medium of 
exchange. They came to be such medium simply in 
consequence of their convenience and their nearly uni- 
form value; and because they were such a medium, 
everybody wanted them, and whoever had them 
could get with them whatever else he wanted. Be- 
cause the great thing was to get money, men seemed 
to think that money was the only thing to be got ! 

I cannot find that the Bullion theory had anything 
better to support it than these two deceptive pillars ; 



\ 



10 ELEMENTS OF POLITICAL ECONOMY. 

and yet from very early time still long after the dis- 
covery of America, it was considered by the whole 
commercial world to stand on an immovable basis. 
The commercial policy that sprung from this theory 
was obvious and universal. If gold and silver are 
the only wealth, then by all means keep the gold and 
silver in the country ! Get all you can in, and let as 
little as possible out ! Accordingly very early tlie 
nations passed laws to prohibit the exportation of 
gold and silver. We learn from Cicero, incidentally, 
that this was done repeatedly at E-ome. In one of 
hjs orations he says, " The Senate solemnly decreed 
both many times previously, and again when I was 
consul, that gold and silver ought not to be exported." 
According to Adam Smith there are ancient acts of 
the old Scotch Parliament, which prohibit under 
heavy penalties the carrying gold and silver forth of 
the kingdom. The same thing was done by France 
and England, and probably by every other nation in 
Europe. To encourage the importation of the pre- 
cious metals, and discourage their exportation, seemed 
to them the high road to national wealth. And in- 
deed it would have been, had the Bullion theory 
been correct. But the Bullion theory was not cor- 
rect. The clearness of our views in Political Econ- 
omy will largely depend upon our thorough emanci- 
pation from the prejudice that gold and silver are 
any more valuable or any more desirable than the 
products for which they exchange. They constitute 
a part, but only a small fractional part, of the values 
of any country. 

About the year 1600, there sprung up in Europe 
a second general commercial theory, which is usually 



HISTORY OF THE SCIENCE. 11 

termed the Mercantile System. It took its origin 
somewhat in this way. The discovery of an ocean 
path to the Indies, the great improvements in navi- 
gation, and the general waking up of the spirit of 
enterprise in the preceding century, gave a vast 
extension to commerce. The English merchants, 
particularly, found the prohibitions against the ex- 
portation of gold and silver very inconvenient. 
They found that, by carrying gold and silver to the 
East Indies, they could bring back articles worth 
greatly more in England than the specie they car- 
ried out; that is, with the imports they brought in 
they could buy more gold and silver than the sum 
they had exported. Therefore, in the year IGOO, the 
English East India Company asked and obtained 
leave of Parliament to export a limited quantity of 
gold and silver. The adherents of the old theory 
raised a great storm, alleging that this Company 
would impoverish the kingdom by gradually drain- 
ing off the gold and silver, that is, the national 
wealth. 

The advocates of the Company, on the other 
hand, though they did not venture to assail the doc- 
trine that wealth consists in gold and silver alone, 
took narrower ground, and asserted that the export 
of money is advantageous, whenever the articles 
bought by it and imported, are chiefly reexported to 
other countries and sold for as much money as was 
originally carried out; and also whenever the export 
of coin, and the consequent import of commodities, 
occasions, though indirectly, a greater value of ex- 
ports from home of native products. Thomas INIun, 
a writer of that period, quoted by Adam Smith, 



12 ELEMENTS OF POLITICAL ECONOMY. 

compares the trade of the merchant exporting gold 
and silver, to the seed-time and harvest of agricul- 
ture. " If we only behold," says he, " the actions 
of the husbandman in the seed-time, when he cast- 
eth away much good corn into the ground, we shall 
account him rather a madman than a husbandman. 
But when we consider his labors in the harvest, 
which is the end of his endeavors, we shall find the 
worth and plentiful increase of his actions." In a 
word, the Mercantile System reasoned thus : If a 
country only exports more than it imports, then the 
balance must come back in gold and silver ; and if 
it keeps exporting more than it imports, and the 
balance keeps coming back in gold and silver, then 
the country must grow rich. Hence the great and 
only care was to preserve the balance of trade, as it 
was called. A famous phrase this, the balance of 
trade ! The legislation, the diplomacy, the politics 
of the two centuries preceding the present were full 
of it. 

By the balance of trade was meant the excess of 
the value of the commodities exported over the 
value of the commodities imported, which excess, it 
was supposed, would always come back in the form 
of gold and silver. Hence unlimited pains were 
taken to make the exports greater than the imports, 
and the excess was regarded as the measure of a 
country's commercial prosperity. Various devices 
were employed to make the exports great and the 
irnports little. To increase the amount of exports, 
bounties were offered to domestic producers, to en- 
courage them to sell as much as possible to foreign 
countries. With the same end in view, the raw ma- 



HISTORY OF THE SCIENCE. 13 

terials of domestic manufactures were forbidden to 
be exported, so that the finished products, thereby- 
rendered greater in amount, might help swell the 
exports. Colonies were planted with similar intent, 
that the mother country might find an open market 
there, and swell her exports. To diminish the aggre- 
gate of imports, prohibitions were laid on the bring- 
ing in from abroad articles which could be made or 
grown at home ; and heavy restrictions imposed on 
imports from those countries with which the balance 
was supposed to be unfavorable, while the same 
articles, perhaps of an inferior quality, were admit- 
ted on easier terms from countries with which the 
balance was supposed to be better. Thus every- 
thing was sought to be regulated in view of. an 
imaginary balance of trade. The Mercantile System 
was the prolific mother of those commercial restric- 
tions, those attempted regulations of manufactures, 
those doctrines of monopoly, of corn-laws, and colo- 
nies, which have fettered industry almost up to the 
present time. 
(" The particular fallacies that lurk in the Mercantile 
System, and the tortuous and cramping policy that 
grew out of it, will be more fitly discussed at a later 
stage of our inquiries ; this is a proper place to indi- 
cate in general that the whole system is based on a 
misapprehension. It overlooks entirely the mutual 
benefit to the parties of every act of exchange, with- 
out which benefit the exchange clearly would not 
take place at all, and makes the whole advantage of 
commerce consist in a certain balance of gold and 
silver, which comes back to that one of the parties 
which has managed to part with more of its own 



14 elejments of political economy. 

commodities. It seems strange that it did not occur 
to those people, that, if it were worth while to trade 
at all, the benefits of the trade were rather to be 
measured by the amount and value of what was 

V received, than by the amount and value of what 
was parted with ! Moreover, the system takes for 
granted, that traders carry forth goods to foreign 
countries to receive back goods and bullion worth as 
much, — less goods, indeed, and the balance in bul- 
lion. Why on that principle should the goods be 
carried forth at all ? The labors, the risks, and the 
exchanges all made ; the goods and the balance 
received ; and the country just as well, but no bet- 
ter off than before ! One thing is certain and obvi- 
ous. Unless the imports, whether including any 
specie balance or not, are worth more to the country 
importing, than the exports, they certainly would 
not be imported. This difference of value in favor 
of the imports is precisely the motive for the impor- 
tation. If they are worth only as much as, or less 
than, what is exported to pay for them, where is the 
advantage of the trade ? Speaking generally, then, 
the value of the imports into any country is always 
greater than the value of the exports, the comparison 
of course being made in that country and not else- 
where. The whole wisdom of the Mercantile Sys- 

\ tem was to sell as much as possible and buy as little 
as possible, — a wisdom which is evident folly, inas- 
much as, universally applied, it would destroy the 
commerce of the world. 

The leading commercial nations of Europe, nev- 
ertheless, fell into the meshes of the Mercantile 
System. Portugal, Spain, France, Holland, and 



niSTOKY OF THE SCIENCE. 15 

England, all gave their attention to the balance of 
trade, all laid restrictions on the natural freedom 
of industry, and all applied the system rigidly to 
their colonial dependencies. These restrictions on 
trade, especially on the importation of manufactured 
goods, and on the exportation of corn and raw mate- 
irals, to say nothing of the bounties which the people 
were taxed to pay, were to the last degree vexatious 
and onerous ; while the penalties for their infringe- 
ment were in many cases cruel and even barbarous. 
Various writers in the different countries, and partic- 
ularly in England, where the laws in question were, 
perhaps, the most oppressive, began to attack the mer- 
cantile theory and the policy that had grown out of 
it. And it is to this series of writers in long succes- 
sion, some overthrowing one false position, and some 
another, one establishing a truth here and another 
there, that we owe the gradual development and 
present state of the science of Political Economy. 
The science has gradually emerged from the waves 
of thought dashing and roaring around the Mercan- 
tile System. It is still necessary, at least on the 
continent of Europe and in the United States, to 
combat some of the remains of the old mercantile 
legislation. England is believed to be the only coun- 
try which has erased from her statute-book the last 
vestiges of the system. This she has done in direct 
consequence of the skill and power with which the 
political economists have guided the public opinion 
of that country ; and it is on account of their suc- 
cess, as well as on account of the superior num- 
bers and weight of English thinkers in this field of 
inquiry, that it is proper now to consider first the 



16 ELEMENTS OF POLITICAL ECONOMY. 

English contributors to the modern science of Politi- 
cal Economy. We shall then attend to what the 
French have done towards building up the science ; 
and, with a few, remarks on the Italian and German 
writers, shall close this sketch with a brief recital of 
American views and writers. 

In the last three decades of the seventeenth cen- 
tury, there appeared in England several tracts and 
treatises, attacking the crooked industrial and com- 
mercial policy of the time.^ Only three writers of 
that period will here be instanced. The first of these 
is Sir William Petty, whose views of money in par- 
ticular are remarkably sound. He fully exposes the 
current notion that a nation can be drained of its 
cash by an unfavorable balance of trade. He con- 
demns the laws regulating the rate of interest, 
observing that there might as well be laws regulat- 
ing the rate of insurance. He ridicules the idea 
that tolls and customs and barriers are advantageous 
to trade. And he was, perhaps, the first to lay down 
the doctrine that the value of commodities is deter- 
mined by the labor required for their production. In 
1691, Sir Dudley North published " Discourses on 
Trade." How liberal and intelligent this writer was, 
how decidedly in advance of his time, may be judged 
of by the following doctrines, which he lays down 
as fundamental : That the whole world, as to trade, 
is but as one nation ; that there can be no trade un- 
profitable to the public, for if any prove so, men 
leave it off, and wherever the traders thrive, the pub- 
lic, of which they are a part, thrive also ; that money 
is a merchandise whereof there may be a glut as 

J- McCulloch's Introductory Discourse. 



HISTORY OF THE SCIENCE. 17 

• 

well as scarcity ; and that money exported in trade 
is an increase to the wealth of the nation. In his 
" Essay on Civil Government," published in 1690, 
at the request of William and Mary, and for the 
justification of the English Revolution of 1688, 
John Locke incidentally illustrated the distinction 
between utility and value, and all but established 
this one of the fundamental doctrines of Political 
Economy : that value is the birth of effort, and not 
the gift of Providence. In the controversy concern- 
ing the recoinage of silver money in the same reign, 
Locke did good service by his tracts on money, in 
preventing the lowering of the currency standard, 
and in diffusing sound principles on the nature of 
money.^ Locke taught as forcibly as had Petty and 
North, that it was as absurd for the State to attempt 
to fix the price of money, as to fix the price of cut- 
lery or broadcloth. 

During the next century, that is, the last century, 
practical questions of taxation, or the rate of inter- 
est, or the vexed questions of trade, drew out in 
England a multitude of ti-acts and treatises, many 
of them containing valuable hints and arguments, 
and the ablest of them all being unquestionably the 
Political Essays of David Hume. These appeared 
in 1752. Among them are essays on Commerce, 
Interest, Balance of Trade, Jealousy of Trade, and 
.Public Credit. His views are enlightened and lib- 
eral ; not always sound, but always interesting. He 
did not profess, however, to analyze value, or to 
ground comprehensively the science of Political 
Economy. That attempt was first successfully 

1 Macaulay's England, chap. xxi. 
2 



18 ELEMENTS OF POLITICAL ECONOMY. 

made by Dr. Adam Smith, Professor in the Uni- 
versity of Glasgow, who published in 1776, his great 
work on the Wealth of Nations, in which many of 
the more important propositions of the science are 
established beyond the reach of controversy. It will 
be noticed that the publication of this work took 
place in the very year in which American Indepen- 
dence was declared ; and it was itself a sort of decla- 
ration of independence of the false principles and 
foolish policy of the Mercantile System. Like the 
document of Jefferson, it excited universal atten- 
tion : like that, it marks an era; and the results in 
the economical world of the treatise of Smith have 
been scarcely less striking and beneficent than the 
results in the political world of the document of 
Jefferson. Indeed, the merits and originality of Dr. 
Smith are so great, that he has frequently been 
called the father of Political Economy. It is hardly 
just that that title should be given to any man ; but 
if it is to be worn by anybody, it must most assur- 
edly be conceded to him. He exalts labor, shows 
the advantages of its division, and advocates its un- 
shackled freedom in all departments ; he unfolds 
the benefits of commerce, and demonstrates the 
absurdity of the restrictive and regulating devices 
of the Mercantile System ; he discusses money, 
wages, profits, rent, taxation, and public expendi- 
tures. The defects of the Wealth of Nations are 
mainly these : a want of clear definitions ; an illog- 
ical arrangement ; an inconsistency sometimes with 
its own principles, as when allowing that a State 
may regulate the rate of interest ; a preference, in its 
theory of value, for material commodities ; a want 



HISTORY OF THE SCIENCE. 19 

.» 

of clear perception of the difference between utility 
and value, and a consequent partial confusion in the 
whole doctrine of values ; and lastly, a prolixity 
which is at times tedious. These defects and some 
others have been pointed out, and valuable addi- 
tional contributions to the science made, by suc- 
ceeding English writers. The principal of these are 
Mr. Ricardo, j\Ir. McCulloch, Mr. DeQuincey, Mr. 
Senior, and especially, Mr. John Stuart Mill. The 
work of the last-mentioned writer, while sharing in ^ 
the fault common to all these English books, namely, 
a too exclusive attention to the material over the 
other forms of value, is the best single treatise on 
the subject in the English language. 

If the French have done less than the English in 
building up the science of Political Economy, they 
have done well what they have done. They have 
the honor of publishing the very first general treatise 
under the title of " Political Economy." It was issued 
at Rouen in 1615. To them also is due the credit 
of having furnished the first writer who undertook 
a systematic analysis of the sources of value, and 
whose ingenious speculations gave rise to the first 
school of Political Economy. This was M. Ques- 
nay, a physician attached to the court of Louis XV., 
whose book was published in 1758.^ His funda- 
mental positions expressed the reaction from the 
principles of the Mercantile System as embodied in 
the policy of Colbert, the famous finance minister of 
Louis XIV. That policy gave a decided preference 
to the industry of the towns and cities. M. Ques- \ 
nay appeared as the champion of agriculture. His 

1 Adam Smith. Book iv., chap. ix. 



20 ELEMENTS OF POLITICAL ECONOMY. 

system assumes that the physical earth is the only 
source of wealth, and consequently that labor is 
incapable of producing any new value except when 
employed in agriculture. Artisans and merchants 
are unproductive laborers, because there is no nett 
produce remaining, as in agriculture, over and above 
the expenses of production. The system mistook 
the nature of rent; and falsely though tacitly as- 
sumed that wealth consists in matter. The novelty 
of the theory however, its scientific shape, and the 
liberal commercial policy coupled with it, gave it for 
a time a great reputation ; and it numbered among 
its disciples no less persons than Turgot, the finan- 
cier, and the elder Mirabeau. The disciples of Ques- 
nay were called Economists or Physiocrats. In 
1802, appeared in Paris, Say's Political Economy. 
Say is throughout an eminently skilful expositor of 
the science, while his own especial contribution is 
a demonstration of the impossibility of a general 
glut, — a general over production. He is an able ad- 
vocate of the freedom of commerce. But the book 
which has carried Political Economy to its most 
advanced position, and the most important contri- 
bution to the science since the time of Adam Smith, 
was published in Paris in 1850. Its author was 
Frederic Bastiat, who died the same year. Its title 
is " Harmonies of Political Economy." It is the first 
volume of what was designed to be a larger work ; 
and in it there is a vigorous demonstration of the 
harmonious mechanism of society, by which, through 
the agency of liberty and property, God has de- 
signed the progressive amelioration of mankind. 
"All legitimate interests are in harmony," is the 



HISTORY OF THE SCIEXCE. 21 

key-note of the book. While unfolding the laws of 
value in their manifold ajDplications, Bastiat inciden- 
tally but most effectually demolishes the vagaries of 
communism, and establishes the right of property 
upon unassailable grounds. Some of the positions 
of this book have been claimed by Mr. Henry C. 
Carey, of Philadelphia, as original with himself ; and 
it seems probable that M. Bastiat did profit by some 
of the views of Mr. Carey, but the substantial origi- 
nality and the uncommon merit of the French 
writer are undeniable. 

The Italian and German writers, although volu- 
minous and respectable, have originated compara- 
tively little within the field of this science. The first 
professorship of Political Economy was established 
in Italy in 1764 ; and able men are teaching the sub- 
ject in most of the German universities at present. 

The circumstances of the United States, as well 
in colonial vassalage as in an independent position, 
their experience with almost every variety of paper 
money, the alternations of the national policy in 
respect to trade, the long continued public discus- 
sions on the tendencies and results of a protective 
tariff, and the efforts — State and National — which 
have been made towards realizing a healthful cur- 
rency, have been favorable to the cultivation of 
economical studies. It is not true, however, that 
many works of decided merit have yet appeared in 
the United States. Daniel Raymond's " Thoughts 
on Political Economy," published at Baltimore in 
1820, are remarkable only as being the first formal 
treatise published in this country. Fourteen years 
later, John Rae, a Scotchman, published at Boston 



22 ELEMENTS OF POLITICAL ECONOMY. 

a book on the subject, which has elicited a strong 
commendation from John Stuart Mill. He says of 
it : '^ In no other book known to me, is so much 
light thrown, both from principles and history, on the 
causes which determine the accumulation of capi- 
tal." The only other American writer whose name 
requires to be mentioned in this connection, is Mr. 
Carey, whose economical works have been published 
at intervals between 1835 and 1860. It is impossible 
in this place to characterize at any length the pecu- 
liar views, many of them original and important, 
which are brought out in these publications. Among 
them may be enumerated the following : That it is 
not so much the cost of production as what would 
be the cost of reproduction, that determines the 
value of commodities ; that the real interests of 
classes and individuals are essentially harmonious ; 
that there is a constant tendency to increase in the 
wages of labor, and to diminution in the rate, 
though to increase in the aggregate, of the profits 
of capital ; that the well-being and advancement of 
society correspond to the degrees of association and 
of liberty which exist in it; and that the prices of 
land, labor, and raw materials, tend constantly to 
approximate the prices of finished commodities, and 
in the closeness of this approximation is to be found 
the best gauge of advancing civilization. 



FIELD OF THE SCIENCE. 23 



CHAPTER 11. 

FIELD OF THE SCIENCE. 

When Adam Smith taught Political Economy in 
the University of Glasgow, it was as a branch of 
moral philosophy, and the substance of his " Wealth 
of Nations" was delivered first in the form of lectures, 
which made up a part of his moral philosophy course. 
That course was divided into four parts : tlie first com- 
prising natural theology ; the second, ethics, or what 
Paley terms the science of duty and the reasons of 
it; the third jurisprudence, or that part of morality 
which relates to justice; while in the fourth part he 
examined those political and social regulations which 
are founded on expediency, and which tend to in- 
crease the prosperity and power of a State. 

Now, expediency is so radically distinct from duty 
that there is no need of proving that Political Econ- 
omy is not to be reckoned a part of moral philosophy 
at all. The idea of obligation, on which the science 
of morals is founded, and the idea of value on which 
the science of economy is founded, are totally dis- 
tinct ideas. There is one word that marks and cir- 
cumscribes the field of morals. That word is Ought. 
There is one word that marks and circumscribes the 
field of economy. That word is Value. Political 
Economy does not aspire to place its feet upon the 
ponderous imperatives of moral obligation. It finds 



24 ELEMENTS OF POLITICAL ECONOMY. 

a solid and adequate footing upon the expedient and 
the useful. As a science, it does and must discuss 
and decide all questions upon economical grounds 
alone. As a science, it has no concern with ques- 
tions of moral right. If it favors morality, it does so 
because morality favors production. It favors hon- 
esty because honesty favors exchange. It puts the 
seal of the market upon all the virtues. It condemns 
slavery, not because slavery is morally wrong, but 
because it is economically ruinous. Moral science 
appeals only to an enlightened conscience, and cer- 
tain conduct is approved because it is right, and for 
no other reason. Political Economy appeals only 
-N, to an enlightened selfishness, and exchanges are 
made because they are mutually advantageous, and 
for no other reason. Each of the two sciences, there- 
fore, has a distinct basis and sphere of its own. The 
grounds of Economy and morals are independent and 
incommensurable. 

Every science, however, has its points of contact 
with other sciences ; and this is particularly the case 
with Political Economy in relation to moral science, 
and is the reason why the two have sometimes 
been confounded. The sound conclusions of the one 
are harmonious with the sound conclusions of the 
other. Both work together for the good of men, for 
the amelioration of their condition. Their spheres, 
though distinct, nevertheless touch each other. Duty 
and interest lie alongside. The ultimate analysis 
of property, for example, will, as we shall see, lead 
the inquirer into the higher region of moral science. 
In legislation also, the question is frequently at the 
same time an economical and a moral question. Dr. 



FIELD OF THE SCIENCE. 25 

Wayland has observed that " almost every question 
of the one science may be argued on grounds belong- 
ing to the other." But the grounds themselves, it is 
important to remark, must be seen to be, and must 
be kept, distinct. 

In the next place, the very name of the science in- 
dicates that it is a political, that is, a social science. 
It relates to men in a state of society, and not to 
men in a state of isolation. The hermit, who neither 
buys nor sells, who neither gives nor receives any- 
thing in exchange, is not amenable to the laws of 
Political Economy. So far as men satisfy their own 
wants by their own efforts without exchange, they 
stand outside the pale of this science. Under those 
circumstances the idea of value could neither have 
birth nor being, and of course there would be no 
such thing as a science of value. Robinson Crusoe 
came to lead a very tolerable life upon his desolate 
island by means of his own industry. He worked, 
but then he worked to satisfy his own wants directly. 
He did everything for himself. He had no oppor- 
tunity to buy anything, sell anything, exchange any- 
thing. The whole course of such a life could never 
have developed the idea of value, and the record of 
the whole experience of such a solitary individual 
would require no such word as value. If God had 
made men so that their varied wants would best be 
met by applying their own efforts to satisfy these 
wants directly, without the intervention of exchange, 
there would have been, there could have been, no 
such science as the one to which attention is now di- 
rected. In that case, men would live, if they lived 
at all, in perfect isolation. Every man would satisfy 



26 ELEMENTS OF POLITICAL ECONOMY. 

his own desires by his own efforts. There would be 
no society, and no exchange. 

But it is evident at the very first glance, that the 
Creator has not made men thus. Society is God's 
handiwork. It is the most complicated and the 
most wonderful, as it was the final, work of his 
hands. The first man, as he stood alone in Para- 
dise, was indeed a wonderful structure, — wonderful 
in his body, and in all his mental and spiritual pow- 
ers. But it was not good that the man should be 
alone. Society must be provided for ; and in pro- 
viding for a society of human beings, God impressed 
upon that organization, as upon all others, its own 
proper and peculiar laws. These laws embrace its 
entire organization, in its lower, as well as in its 
higher, parts. They cover the phenomena of ex- 
change, just as they cover the phenomena of morals ; 
and no intelligent observer can watch their working, 
when left intact and free, without being stimulated 
and gladdened by the beneficent results to which 
they lead. If the footsteps of providential intelli- 
gence be found anywhere upon this earth, if proofs 
of God's goodness be anywhere discernible, they are 
discernible, and are found in the fundamental laws 
of society. Certainly, if every man could satisfy all 
his desires as well, by putting forth his efforts to that 
end directly, he would do it. He would grow his 
own food, make his own clothes, write and publish 
his own newspaper, be his own doctor, in one word, 
perform all needed services for himself. But God 
has so ordered it that he cannot do this. He cannot, 
in a state of isolation, with all his efforts, procure for 
himself one thousandth part of the comforts which 



FIELD OF THE SCIENCE. 27 

he easily procures for himself by less efforts, through 
exchange. Society and exchange are, under God's 
ordination, matters of necessity, if men are to rise in 
a scale of comforts perceptibly above the brutes. 
And the reason is this. There are obstacles, in all 
directions, to the satisfaction of men's desires. K 
the desires are to be met, these obstacles are to be 
surmounted. But if one man undertakes to sur- 
mount any considerable number of these obstacles, 
he miserably fails. His powers are not adequate to 
the task ; and hence we say, that in a state of isola- 
tion, men's wants exceed their powers. But, if he 
devote himself to surmounting one class of obstacles, 
as, for instance, those in the way of procuring suita- 
ble clothing, his powers are adequate to this, he soon 
acquires skill in it, he learns to avail himself of the 
gratuitous help of Nature, and the facilitating pro- 
cesses of art, he is able to realize large products along 
his line, and is now in position to offer valuable ser- 
vices to society. Meanwhile other men have been 
devoting themselves each to another class of obsta- 
cles, have concentrated effort and skill upon them, 
have succeeded by the help of Nature and art in sur- 
mounting them, and now offer their valuable services 
to society. 

Now, then, these services are mutually exchanged 
in all directions, and men find, as it is God's clear 
design that they should find, that, by making given 
efforts along one line, and exchanging them for cor- 
responding efforts along other lines, they obtain vast- 
ly greater satisfactions for their various desires than 
they could obtain by direct effort. Why ? Because 
there is now a vast increase of useful products in 



28 ELEMENTS OF POLITICAL ECONOMY. 

existence. Here we have reached, provisionally, the 
true explanation of the gains of exchange. It is not 
so mnch that by exchange men get better and cheaper 
articles, as it is that they get more of them. By 
the division of employments, which is only possible 
under a system of exchange ; by the fact that, under 
free exchange, men avail themselves of all the varied 
advantages of Nature and position ; the number and 
variety of useful products created, the number and 
variety of the services which men are able to render 
to each other, are immeasurably augmented. More 
is produced, more is to be exchanged, and therefore 
there are more satisfactions of all men's desires. 
Political Economy, therefore, which unfolds the rea- 
sons and the laws of exchange, finds its only field 
in a state of society. It is truly a political, that is, 
a social science. 

In determining now more definitely still the field 
of our science, we will look at some of the leading 
definitions of it which have been given by different 
writers. Mr. Senior defines it " the science which 
treats of the nature, the production, and the distri- 
bution of wealth." Mr. McCuUoch regards it "the 
science of the laws which regulate the production of 
those material products which have exchangeable 
value, and which are either necessary, useful, or 
agreeable to man." Archbishop Whately gives it 
the name of " catalactics, or the science of ex- 
changes." Among several equivalent definitions 
which he is at pains to give, Mr. Mill places first, — 
" the science which treats of the production and 
distribution of wealth, so far as they depend upon 
the laws of human nature." The French writers 



FIELD OF THE SCIENCE. 29 

give definitions somewhat broader. M. Storch says 
it " is the science of the natural laws which deter- 
mine the prosperity of nations, that is to say, their 
wealth and civilization." M. Sismondi regards " as 
the object of political economy the physical welfare 
of man, so far as it can be the work of government." 
And M. Say defines it as " the economy of society ; 
a science combining the results of our observations 
on the nature and functions of the different parts of 
the social body." And lastly, Mr. Carey, in this 
country, dropping the title Political Economy as a 
general designation, and adopting the term " Social 
Science " in its stead, defines it as " the science of 
the laws which govern man in his efforts to secure 
for himself the highest individuality and the greatest 
power of association with his fellow-men." 

It will be noticed that in several of the preceding 
definitions the term wealth is introduced as a part 
of the definition. This word wealth has been the 
bane of. Political Economy. It is the bog whence 
most of the mists have arisen which have beclouded 
the whole subject. From its indefiniteness, and the 
variety of associations it carries along with it in 
different minds, it is totally unfit for any scientific 
purpose whatever. It is itself almost impossible to 
be defined, and consequently can serve no useful 
purpose in a definition of anything else. It has been 
much debated, for example, among political econo- 
mists, whether the term wealth includes anything 
more than material products, such as houses, lands, 
metals, tools, food ; or whether the skill of artisans 
and the services of professional men are also to be 
reckoned as wealth. Some include under the term 



\ 



30 ELEMENTS OF POLITICAL ECONOMY. 

only material products ; others, as Mr. Mill, widen 
the signification so as to take in those immaterial 
services which result in an increase of material prod- 
ucts; while others still, with evident violence to the 
current meaning of the word, include under it all 
things, whether material or immaterial, for which 
something may be obtained in exchange. Thus the 
meaning of the word wealth has never yet been set- 
tled ; and if Political Economy must wait until that 
work be done as a preliminary, the science will never 
be satisfactorily constructed. It is simply impossible, 
on such an indefinite word as this at the foundation, 
to build up a complete science of Political Economy. 
Moreover the word wealth includes the two distinct 
ideas of value and utility, — ideas which must be 
kept perfectly distinct, or else there is no soiimd think- 
ing and no sound conclusions within this field. Men 
may think, and talk, and write, and dispute till dooms- 
day, but until they come to use words with definite- 
ness, and mean the same thing by the same word, 
they reach comparatively few results, and make but 
little progress. And it is just at this point that we 
find the first grand reason of the slow advance hith- 
erto made by this science. It undertook to use a 
word for scientific purposes which no amount of 
manipulation and explanation could make suitable 
for that service. Happily there is no need to use this 
word. In emancipating itself from the word wealth 
as a technical term, Political Economy has dropped 
a clog, and its movements are now relatively free. 

Of the other definitions quoted, against which the 
objection just considered does not lie, some embrace 
too little, and others embrace too much. The only 



FIELD OF THE SCIENCE. 31 

one which seems to the present writer to be exactly 
right, is the definition given by Archbishop Whately, 
namely, the science of exchanges. This definition, 
or its precise equivalent, the science of value, gives a 
perfectly definite field to Political Economy. Wher- 
ever value goes this science goes, and where value 
stops this science stops. Political Economy is the 
science of value, and of nothing else. To determine 
with distinctness what value is, to separate it from 
some things which have often been confounded with 
it, and thus to lay a foundation for the science at 
once satisfactory and complete, will be the work of 
the next chapter. But it is in order at this point to 
call attention to the second grand reason of the slow 
advance hitherto made in this field of inquiry. Value 
is a relative word. It is usually defined as purchas- 
ing-power, that is to say, the value of anything is 
its power of purchasing other things. It is not an 
independent quality of one thing, as hardness is a 
quality of a stone, but it is a quality of one thing 
as estimated in a corresponding quality of something 
else. It is not a quality, in and of itself, of gold, but 
a relation which gold holds to other things which 
gold will buy. The notion of value is not conceiva- 
ble except by a comparison of two things, and what 
is more, of two things mutually exchanged. Politi- 
cal Economy therefore is based upon a relative idea, 
and has to do from beginning to end with a relation. 
Now in this there is an inherent difficulty, and a 
difficulty too which can never be obviated. It lies 
in the very nature of the subject. Men much more 
readily apprehend an absolute idea than a relative 
one. They more easily follow a discussion touching 



\ 



32 ELEMENTS OF POLITICAL ECONOMY. 

the independent attributes of single objects, such as 
length, breadth, thickness, and many others, than a 
discussion touching value, which is not an attribute 
of any one thing, but a relation subsisting between 
two things. I am not aware that this difficulty has 
ever been remarked on by any writer, but I am at 
the same time very sure that it constitutes the prin- 
cipal difficulty in this class of inquiries, and has been 
the main reason of the tardy progress hitherto made 
in them. A careful analysis of the nature of value, 
and copious illustration bestowed upon the elements 
of the subject, will lessen this difficulty as much as 
the nature of the case will allow. To this then we 
next proceed. 



ON VALUE. 33 



CHAPTER III. 

ON VALUE. 

If I take up a new lead-pencil from my table, for 
the purpose of examining all its qualities, I shall 
immediately perceive those which are visible and 
tangible. The pencil has length, a cylindrical form, 
a black color, is hard to the touch, is composed of 
wood and plumbago in certain relations to each 
other, and has the quality, when sharpened at the 
end, of making black marks upon white paper. 
Are then these, and such as these, the only qualities 
of the pencil? No. It has another quality very 
important, which is neither visible nor tangible, but 
relative. It has purchasing-power. It had the power 
of purchasing from me, two days ago, the sum of 
ten cents. United States currency ; and if I should 
choose to take it back to the store where the ex- 
change was made, it has doubtless the quality still 
of being able to purchase again from the storekeeper 
the same number of cents which it first purchased 
from me. 

This purchasing-power, which the pencil pos- 
sesses in common with all other articles which are 
ever bought, sold, or exchanged, is value, and is the 
subject of Political Economy. It is absolutely essen- 
tial, in order to engage in any discussions in Politi- 
cal Economy with the least hope of sound results, 
3 



\ 



34 ELEIVIENTS OF POLITICAL ECONOMY. 

to determine with distinctness the nature of value, 
to use the term always in the same sense, and not 
to confound the thing itself with other things that 
may be similar. It is convenient to regard value as 
a quality inhering in a commodity or service. The 
convenience of such expressions as, " the pencil has 
value," " gold has value," is so great, that science 
will not consent to forego the advantage of using 
them, even though they are not scientifically accu- 
rate. She justly prefers to make her language intel- 
ligible and popular, and then to explain precisely 
what she means by it. Strictly speaking, value is 
not a quality of any one thing, but a relation which 
one thing holds to another thing. It is not a quality 
in and of itself of gold, but a relation which gold 
holds to other things that gold will buy. It is not, 
therefore, true, speaking strictly, that value is a qual- 
ity of gold in the sense in which weight is a quality 
of gold, because circumstances are easily conceiva- 
ble, and have often occurred, under which gold 
would have no value at all. To the crew of a boat 
abandoned at sea, among whom the last biscuit had 
been rationed out, a bag of gold belonging to one of 
the men would not purchase a biscuit belonging to 
another. The inherent qualities of the gold are 
present. It is still hard, and yellow, and heavy. 
But valuable it is not. It will not purchase any- 
thing. Value, therefore, is not an inherent and 
invariable attribute, but is the relative power which 
one thing has of purchasing other things. This 
power in any one thing will vary according to time 
and place and circumstances. It may cease alto- 
gether, as in the case just supposed, or it may rise 



ON VALUE. 35 

under other circumstances to a very high degree ; 
but whenever it exists, it exists with reference to 
some other thing, which either is, or is supposed to 
be, exchanged with it. Ten cents had the power of 
purchasing my pencil, and my pencil has the power 
of purchasing ten cents. In this transaction the idea 
of value is developed. A similar transaction first 
introduced that idea into the world, and the endless 
succession and variety of such transactions has kept 
the idea in the world, and will keep it. here till the 
end of time. Value, then, speaking strictly, is not 
an independent quality of the pencil, any more than 
it is an independent quality of the cents. Both are 
necessary in order that the value of either may be 
conceived of. The value of the cents is estimated, 
is measured by the pencil ; and the value of the 
pencil is estimated, is measured by the cents. In 
one word, value is always relative, and never abso- 
lute. To say that anything has an absolute value 
is a simple contradiction in terms. 

But why was I desirous to part with good United 
States money for the sake of the pencil, and the 
storekeeper to part with a good pencil for the 
sake of the money ? The answer to this question 
will ground the science of value on the unchanging 
principles of human nature. I experience a want 
which the pencil was adapted to satisfy. He expe- 
rienced a want which the money was adapted to 
satisfy. But between my want and its satisfaction, 
both of which were personal to me, there lay an effort, 
to be made either by myself or by somebody else in 
my behalf. So, between his want and its satisfac- 
tion, both of which were personal to him, there lay 



36 ELEMENTS OF POLITICAL ECONOMY. 

an effort, to be made either by himself or by some- 
body else in his behalf. If I had chosen to do so, I 
might have made the direct effort necessary in order 
to supply myself with a pencil. I might have made 
the pencil for myself. It would indeed have been a 
long and tedious process, would have required a 
learning of two or three trades, a journey to some 
plumbago-bed, the working and preparation of the 
mineral, and various other subordinate processes ; 
still, in the course of half a life-time it might per- 
haps have been done, and I might by direct efforts 
have supplied myself with a pencil as good as that 
which I purchased. So, too, the storekeeper, unless 
the laws had prevented it, might have procured for 
himself by direct efforts the ' metal cents which I 
gave him in exchange for the pencil. He might 
have dug the ores for himself, refined, alloyed, and 
minted them. Had we chosen respectively to take 
this course, and each been able to satisfy his own 
particular desire by his own unassisted efforts, the 
processes in either case would have had no relation 
to Political Economy. There would be in each 
case a want, an effort, a satisfaction, but there would 
be no exchange. As a matter of fact, however, we 
exchanged the efforts which lay between our respec- 
tive desires and their respective satisfactions. I de- 
sired a pencil, he relieved me of the effort necessary 
to make it, and I experienced the satisfaction. He 
desired the cents, I relieved him of the effort neces- 
sary to procure them, and he again experienced the 
satisfaction. We each experienced our own desires, 
and our ow^n satisfactions, but w^e exchanged efforts. 
Precisely in this exchange of efforts arose the phe- 



ON VALUE. 37 

nomenon of value. I parted with my cents, which 
had cost me an effort, in order to satisfy my desire 
for a pencil, because my effort, represented in the 
cents, was less than the effort it would cost me to 
create the pencil. The shopkeeper parted with the 
pencil, which had cost him an effort, in order to sat- 
isfy his desire for the cents, because his effort, repre- 
sented in the pencil, was less than the effort which 
it would otherwise cost him to procure the cents. 
We exchanged efforts, therefore, for our mutual 
advantage. 

The principles of human nature, then, on which 
the laws of value are grounded, are these : Men 
have desires, are capable of making efforts to meet 
these desires, and experience a satisfaction when 
the desires are met. These three are indisputable 
and universal facts. But while the desire and the 
satisfaction are strictly personal to one man, that is 
to say, belong to bim and cannot be communicated 
to another, it is not so with efforts. Efforts are ex- 
changeable. You have a desh-e, I make the effort 
to meet it, and you again experience the satisfaction. 
On the other hand, I have a desire, you make the 
effort to meet it, and I again have the satisfaction. 
We exchange efforts, but experience our own satis- 
factions. Desires, efforts, satisfactions, constitute 
the one circle of Political Economy, and value arises 
in every case from a comparison of two correspond- 
ing efforts. Efforts are naturally irksome. Every- 
body wishes to realize as large a satisfaction as 
possible from a given effort. If, by making that 
effort for another, a larger satisfaction will be real- 
ized than by expending it directly for one's self, there 



38 ELEMENTS OF POLITICAL ECONOMY. 

is an immediate and pressing motive to make the 
effort for another, and to reach the satisfaction, not 
directly, but indirectly, that is, by exchange. A pre- 
cisely similar motive actuates that other person. If 
his given effort will realize more for himself by be- 
ing put forth for the first man, and by accepting the 
first man's effort in return, he too will be anxious to 
exchange efforts with the first. There is a mutual 
advantage in thus exchanging. A given effort real- 
izes better satisfactions for each of the parties, and 
the reason for exchanges is thus seen to spring from 
the most active and invariable principles of human 
nature. 

Value, then, has reference to efforts, to services ; 
is measurable in and exchangeable for these. And 
men find by experience — and this is one of the 
grand harmonies of society — that they gain more 
satisfactions for less efforts, by thus exchanging 
efforts. It is because there are obstacles to be sur- 
mounted in order that men's various desires may be 
met ; and because any one may choose what class 
of obstacles he will devote himself to surmounting, 
and then exchange his efforts along that line with 
the efforts of other men along their lines ; and be- 
cause by thus doing the satisfactions of all bear a 
larger and larger proportion to their efforts, that 
exchange plays so vast a part in the world's affairs. 

The exchange of the cents for the pencil, and the 
pencil for the cents, is a simple case of value, but it 
is not the simplest. In this case there is an ex- 
change of one commodity for another commodity, 
the idea of value is instantly developed, and we say 
that the pencil is worth ten cents, or, what is exactly 



ON VALUE. 39 

equivalent, ten cents are worth the pencil. There 
are two things in every exchange, — that which is 
parted with and that ^vhich is received. Attention 
should be constantly directed to both. Many errors 
in science, and numberless mistakes in legislation, 
have arisen from not attending to this circumstance, 
as if it were the glory of trade to sell rather than to 
buy, whereas it is not possible to sell without buy- 
ing, because the pay must be taken for what is sold. 
In every exchange, therefore, of commodity for com- 
modity, the value of each is expressed in the other, 
and the relation between the two purchasing-powers 
is adjusted. This is the common case. The trade 
of all past ages, and the present commerce of five 
continents, presents us, in principle, with nothing 
different from this. The commerce of the world is 
substantially barter, that is, the exchange of com- 
modities for commodities; and, though many pur- 
chases and sales may intervene, and money may 
play its part in facilitating the exchange, and many 
forms of credit may come in, before the transaction 
is finally closed, these do not alter in the slightest 
particular either the notion of value or its laws. 
Each repeated purchase and sale presents us over 
and over again with the same phenomenon, namely, 
the estimated relation of two purchasing- powers. 
And this relation is value. 

The sitnplest case of value, however, w'ill throw 
light upon the more complex ones, and will be found 
to include them. Two farmers, who are neighbors, 
find, on talking over their respective crops, that one 
has more hoeing and less haying this year than 
usual, and the other less hoeing and more haying. 



40 ELEMENTS OF POLITICAL ECONOMY. 

A says to B, " Come over and help me hoe in 
June, and I will go over and help you hay in July." 
B agrees. It is a mutual advantage. And so, to 
use the old expression, which is better here than 
any scientific terms could be, they change works. B 
does a service for A, and A does a service for B. 
The two services balance each other. They are 
mutually exchanged one for the other; and in the 
very proposal thus to exchange them the notion of 
value is conceived, and in the exchange itself value 
is both produced and measured. B's help in hoeing 
is worth A's help in haying. 

This exchange of one service for another service 
presents the simplest case cf value ; and I now pro- 
ceed to show that it essentially includes all other 
cases. If it can be shown that value is always and 
everywhere the same thing, that it is always and 
everywhere the relation between two services 
EXCHANGED, then will Political Economy be seen 
to possess one grand characteristic of the great 
sciences, namely, simplicity. This can be shown. 
There are only three cases of value conceivable. 
1st. When a service is exchange for a service, as 
by the two farmers already supposed. 2d. When 
a service is exchanged for a commodity, as when 
the lawyer gives his client counsel and receives five 
dollars in return. 3d. When a commodity is ex- 
changed for a commodity, which is the common 
case of commerce. Any cases of value which do 
not seem, at first sight, to come under one of these 
three, will be seen after all, on reflection, to come 
there. For instance, if a man invests money in the 
national debt, and buys the government bonds, it is 



ON VALUE. 41 

exchange of commodity for commodity. The bonds 
give him a claim on the national property. So with 
a mortgage. So with any form of credit. These 
are commodities. 

Now, then, what is really exchanged in all these 
three cases, are mutual services. The client, with 
five dollars in his pocket, is just as much in position 
to do the lawyer a service, as the lawyer is in posi- 
tion to do him a service. The counsel is serviceable 
to the client, and the dollars are serviceable to the 
lawyer, and so they exchange. Value is the esti- 
mated relation between the two. And just so when 
commodities are exchanged with each other. The 
hatter serves you with a hat, and the shoemaker 
with a pair of boots, and you serve them with six 
dollars each ; or if the hatter be in want of boots, 
and the shoemaker of a hat, they serve each other 
with their respective products. In every case of 
value, therefore, without exception, what is really 
exchanged, whether a commodity intervene or not, 
are mutual services ; and value is then produced, 
and only then, when two persons are in position to 
render each other a service ; and the respective ser- 
vices being rendered, that is exchanged, and the 
balance being struck, we have the value of one ex- 
pressed in the other. 

Do I, then, obliterate the old distinction between 
services and commodities? Yes, I do, as far as 
the laws of value are concerned. I use the term 
" service " in a broad sense, which includes the spe- 
cific sense and something more. I mean by it, the 
rendering of anything for which something is de- 
manded in return. People sometimes do for others 



42 ELEMENTS OF POLITICAL ECONOMY. 

what are called services, out of sympathy, from be- 
nevolence, from duty ; but the characteristic of these 
is that they are free ; nothing is demanded in return. 
These, therefore, fall in the sphere of morals, and 
are outside the pale of Political Economy. There 
is no such thing as proper exchange within the field 
of morals, and there is nothing else but proper ex- 
change within the field of economy. This principle 
alone marks the boundary-line between the sciences 
referred to. A service, then, in the language of this 
science, and as the word will henceforward be used 
in these pages, is anything rendered to another in 
view of a return, and for the sake of a return. The 
man who furnishes you a barrel of apples, does you, 
in this sense, a service equally with the physician 
who attends upon your fever ; and you pay them 
both on precisely the same principles. You render 
to each an equivalent service in return. To pay 
them money is to render them a service, just as to 
furnish you apples and medical advice were a ser- 
vice to you. Whether a commodity, as apples, 
intervene or not, is, as far as value is concerned, a 
matter of indifference. The more specific use of the 
term "service," as opposed to a commodity, is in- 
deed convenient, and will, doubtless, continue to be 
used: the broader sense is exceedingly useful, and, 
by its aid, we clear up the whole subject of value. 

This ultimate definition of value, namely, that it 
is the relation between two services exchanged, will 
never, it is believed, be materially improved. When 
once a just analysis is made, it is* made for all time. 
And this is the encouragement that men have to 
labor in the field of science. It is a great thing in- 



ON VALUE. 43 

deed to contribute even a subordinate truth towards 
the advancement of any department of knowledge ; 
but that truth, under fuller investigations, may come 
to be seen in a difierent light, and may come to 
occupy a different point from that in which it was 
put by the contributor. But when a correct analy- 
sis is made of the fundamental phenomenon itself, 
with which any science has to do, and on which it 
is reared, there is an end. That work will stand just 
where the fortunate master-builder has placed it. 
This analysis of value, which I believe to be satis- 
factory and final, is not mine. The full credit of it 
is due, as I believe, to the French writer Frederic 
Bastiat. The reasons why we may feel complete 
confidence in it will appear in a more and more 
striking light as we proceed, and until we conclude. 
Confirmations of it will be seen to come up from 
every part of the science, and crown it correct. In 
the first place, this definition covers naturally and 
easily all those anomalous cases of value which have 
been so hard to reduce under any other general view. 
Take for instance the case of the value of the dia- 
mond. The English school, and especially Mr. Mc- 
Culloch, claim that labor is the source of value, and 
that the purchasing-power of everything is propor- 
tioned to the labor which- it has cost. But, take 
care. There must be error in this statement. Value 
is not always proportioned to the mere labor the 
thing has cost. Often it is. Frequently it is not. 
For example, as I am strolling along the sea-shore I 
accidentally perceive a splendid diamond among the 
pebbles. It is but a moment's labor to appropriate 
the prize, but do I on that account sell my diamond 



44 ELEMENTS OF POLITICAL ECONOMY. 

for one dollar less to the jeweller or the prince ? No. 
I am now in position to do a great service to who- 
ever wants a diamond. I demand a large service 
in return, and get it. I say to the man who wants 
it, give me ten thousand dollars for my prize, and 
you shall have it. It would be poor mercantile logic 
for him to reply : Your labor is not worth more than 
one cent a minute, and it did not cost you but one 
minute's labor to get that gem, and certainly one 
cent, therefore, is a fair price for the diamond. He 
rather reasons in this way : Can I by going myself 
to the diamond-bearing regions, or in any diamond 
market elsewhere, procure for myself so good a gem 
as this by a less sacrifice than ten thousand dollars. 
He resolves this question mentally ; and, if nega- 
tively, I am sure of getting my price. In that case 
I am offering him a service worth at least ten thou- 
sand dollars. No one else is in position to render 
him the same service at so favorable a rate. If, on 
the other hand, there be other diamond dealers offer- 
ing gems as good as mine for less than ten thousand 
dollars, then I have pitched my demand too high ; 
my service is not worth that sum, because there is 
some other person ready to render the same service 
for a less sum. The value of my diamond, there- 
fore, is proportioned, not to the labor which it has 
cost me, but to the service which I am able to ren- 
der to the purchaser with it, compared with the ser- 
vice which he is able to render to me. I take advan- 
tage of his desire for the diamond, and crowd up the 
price as near as I can to the point at which he will 
either forego the possession of a diamond altogether, 
or can obtain a similar one from some other party. 



ON VALUE. 45 

He takes advantage of my desire for the money, 
and crowds down the price as near as he can to the 
point at which I can either find another purchaser, 
or should prefer to retain the diamond myself. The 
comparison and adjustment of these two, my ser- 
vice to him and his service to me, fixes, for that sale, 
the value of the diamond. 

And here we must stop to notice what an exceed- 
ingly good word the English language provides us 
with, in this term service. It explains perfectly all 
anomalous, as well as all common cases of value. 
It combines in its own proper meaning all the ele- 
ments which make up and which vary value. First, 
it implies always two persons, the person rendering 
and the person receiving the service. Next, it always 
implies some effort on the part of the person render- 
ing, and some satisfaction on the part of the person 
receiving the service. Thus when one service is 
spoken of there is always implied two persons and 
two things, and the two things are the effort of one 
person and the satisfaction of another. But when 
two services are spoken of as exchanged, as is always 
the case in Political Economy, there is implied, as 
before, two persons, each of whom makes an effort 
for the other, each of whom is recipient of a satis- 
faction which comes from the effort of the other, 
and each of whom estimates in the light of his own 
satisfaction that which is received as compared with 
that which is rendered. It is this reciprocal estima- 
tion alone that constitutes value ; and it is the excel- 
lence, I may almost say the glory of the term ser- 
vice, that it gathers up in its own signification all 
the elements which go to determine value, and which 



46 ELEMENTS OF POLITICAL ECONOMY. 

ever vary its amount. As here is the very kernel 
and core of our science, illustration will be well 
bestowed at this point. Let the parties be A and 
B, in position to render each other a mutual service. 
A has a desire which B's effort can meet, and B has 
a desire which A's effort can meet. Up to the point 
when the exchange takes place there are only four 
elements that play any part in the transaction as 
preparatory to it, namely, two desires and two efforts. 
In the act of exchange itself two other elements 
come into being, namely, two relative estimates, A's 
estimate of B's effort for him as compared with his 
own effort for B, and B's estimate of A's effort for 
him as compared with his own effort for A. As a 
result of the exchange, and as that for the sake of 
which the whole series took place, there appear two 
other elements, namely, two satisfactions. Here is 
the whole of it. Now, then, any change in any one 
of the first four elements will vary value ; and there 
is nothing else in the world that can vary it. If A's 
desire for that which B is ready to render be less- 
ened, the other elements remaining the same, A's 
estimate of B's effort as compared with his own is 
lessened, and value is at once affected. If A's desire 
be increased, other things being equal, his estimate 
of B's service as compared with his own is increased, 
and value is affected. Just so any diminution or en- 
hancement of B's desire for that which A is ready 
to render, acts at once upon B's estimate of A's 
effort as compared with his own, and consequently 
acts at once upon value. Again, any change in 
either effort as compared with the other, such as its 
becoming more or less onerous than the other, will 



ox VALUE. 47 

of course affect the estimate of the one as measured 
by the other, and of course also will vary value. 
These first four elements then are not only the ele- 
ments out of which value subsequently springs, but 
also are the elements any change in any one of 
which, the others remaining the same, will tend to 
vary value, and without a change in some one of 
which, relatively to the others, value never will be 
varied. iThe term services expresses just these ele- 
ments which play and vary as preparatory to the 
realization of value. Value itself is realized from 
the adjustment of the fifth and sixth elements, that 
is to say, from the equalization of A's estimate of 
B's service with B's estimate of A's service. This 
adjustment also, together with the remaining ele- 
ments, the two satisfactions, are all implied in the 
expression mutual services, or, if you please, two 
services exchanged. If any of my readers object to 
this paragraph as abstract, I have only to reply that 
it is no more abstract than the subject-matter ; and 
if any of them find difficulty in the relative nature 
of the transaction unfolded, in the fact that the 
views and comparative estimates of two persons 
must be kept in mind throughout, I can ^nly say, 
that this science starts with a relation and has to do 
with a relation every step of the way to the end. 
This is the one intrinsic, unavoidable difficulty that 
lies at the threshold of the science ; and v^'hoever, 
by taking pains at the outset, familiarizes this diffi- 
culty to his thoughts, and thus overmasters it, will 
walk thenceforward with positive pleasure through 
the whole economic domain. And if there ever was 
a science grateful for a word, as lessening its inhe- 



48 ELEMENTS OF POLITICAL ECONOMY. 

rent difficulties and helping explain its phenomena, 
Political Economy, which has wandered these twice 
forty years in the wilderness of wealth, thankfully 
accepts in the term service its latest and most impor- 
tant gift. 

In the second place, the definition of value which 
is here given expands the field of Political Economy 
to its natural limits. Even Adam Smith, and the 
English economists generally, while defining wealth 
as consisting of material commodities only, have 
experienced a difficulty in excluding from the do- 
main of the science certain mere services, and in 
denying that value resides in these services. Some 
have endeavored to avoid the difficulty in one way 
and some in another. Some have stigmatized those 
who render a mere service to society as unproduc- 
tive laborers, and have gifted with the title of pro- 
ductive laborers all those who bring forward some 
vendible commodity. John Stuart Mill, as we have 
seen, enlarged his definition of wealth so as to take 
in all those sorts of mere services whose action goes 
directly to swell the volume of material commodi- 
ties. It is conceded then that value resides in some 
services ; why not then in all services which are put 
forth for the sake of a return ? Why allow value to 
a service which comes to be embodied in a commod- 
ity, and deny the term to another service just as 
necessary to our comfort that is not thus embodied ? 
Why class the brick-maker as a productive laborer, 
and refuse the epithet to the hod-carrier, without 
whose help the bricks would never reach their ulti- 
mate destination ? The truth is there is no ground 
for this distinction ; and the very difficulty which 



ON VALUE. 49 

the various writers have found in trying to make it, 
is a pretty sure proof that it ought not to be made 
at all. By making its definitions such that value 
can only be supposed to reside in tangible commod- 
ities, Political Economy excludes itself, without any 
good reason, from a large portion of its own field. 
Let us see if there be any good reason. For exam- 
ple, a man buys a spelling-book for his boy, for the 
sake of his learning to read. He then hires a teacher 
to teach him to read. According to the usual defi- 
nitions the spelling-book has value, while the service 
of the teacher has none. But why has it none ? It 
has to be paid for, certainly, as much as the spelling- 
book has to be paid for. There are two separate 
exchanges ; first, of money for the spelling-book, and 
second, of money for the service. Both are made 
with the same object in view, namely, that the boy 
may learn to read. The want of a spelling-book 
and the want of a teacher are the two external 
obstacles in the way of reaching that object; and 
the father overcomes them both by similar means, 
that is to say, by an exchange ; and there is no such 
.difference in the two transactions as will justify or 
even tolerate the distinction sought to be made be- 
tween them. The teacher sells his service. The 
shopkeeper sells his book. The father renders a ser- 
vice to each equivalent to that received from each. 
Political Economy now claims jurisdiction over both 
transactions alike, and affirms value as truly of the 
service as of the commodity, and more truly of the 
service than of the commodity, inasmuch as it stands 
ready to prove that so far as value resides in any 
commodity it resides there simply in virtue of the 



50 ELEMENTS OF POLITICAL ECONOMY. 

human services which have been concerned in its 
production and which will be subserved by its ex- 
change. What is ultimate, therefore, in all exchange, 
is not commodities but services ; and the services 
which are bought and sold in every department of 
life, the services, for example, of the lawyer, the phy- 
sician, the clergyipan, the teacher, the editor, the 
musician, fall as much within the province of Polit- 
ical Economy as the traffic of commodities in the 
market-place. Our science asserts its claim of juris- 
diction wherever services are mutually exchanged. 

A third advantage of the definition of value now 
given, and one closely connected with the last, will 
be seen in the fact that it frees the discussion from 
a perplexing error which has long infected this class 
of inquiries, namely, that value is somehow or other 
connected with matter. This notion has controlled 
the definitions of wealth ; has led, as we have just 
seen, to groundless distinctions among services ; and 
has taken possession of language so thoroughly that 
no judicious writer will attempt at this late day to 
dislodge it from that strongest of the citadels of 
error. Rather than disturb the current nomencla- 
ture of business he will allow such expressions as 
these to stand : Gold has value, strawberries have 
value. Nay, he will even use such expressions him- 
self, because they are short and intelligible. At the 
same time he will clearly explain and endeavor to 
make everybody see that such expressions are only 
allowable as figures of speech. To speak with sci- 
entific accuracy it is not true to say that gold has 
value, because there are circumstances under which 
it has none. Gold has specific gravity and other 



ON VALUE. 51 

essential qualities always and everywhere, but it has 
value only when human services have been employed 
on it and may be subserved by it; and I now pro- 
ceed to prove and illustrate the position that value 
does not reside in matter, or in any form of matter, 
but only in human services exchanged ; and that, 
therefore, value is never of God's creation, but always 
of man's creation. We shall see abundantly, before 
we finish the chapter, that utility is one thing and 
value quite another. No effort of men can add one 
particle to the existing matter of the globe, but it has 
been supposed that the efforts of men, by changing 
the form of existing matter, impart the quality of 
value to it, and that thenceforth the value remains 
fixed in the matter itself. The efforts of a woodman, 
for example, with the cooperation of nature, can trans- 
form the stock of a tree into wooden bowls, and value 
is now supposed to reside in the vendible bowls, and 
the current language is, that each bowl has a value 
of fifty cents. Why has it a value of fifty cents ? 
Clearly enough, to reward his service who felled the 
tree, and sawed the block, and then hollowed out the 
bowl. But the service having been employed upon 
the matter, and being embodied in it, is not what is 
really sold now the matter, and not the service ? I 
answer, No. What is really sold is the service, and 
not the matter. And this, which at first sight might 
not be thought important, but which is really very im- 
portant, becomes apparent as soon as we reflect that 
any changes in the conditions of the service instantly 
affect the value. Our woodman has on hand a stock 
of one hundred bowls, which he offers for sale at 
fiifty cents apiece, as fairly rewarding his personal 



52 ELEMENTS OF POLITICAL ECONOMY. 

services in their production. But, unknown to him, 
an enterprising neighbor has invented a machine 
which enables him to make bowls in every respect 
equal to the others, and to offer them at twenty-iive 
cents apiece. Whoever now wants a wooden bowl 
can have that service rendered him for twenty-five 
cents return. The first man finds that he cannot 
sell a bowl for over twenty-five cents, and that his 
stock of one hundred has sunk at once in value from 
fifty dollars to twenty - five dollars. What is the 
matter wdth his bowls ? The matter is not in the 
matter. The matter is all there, and the form of 
the matter is all there, but the value is just one half 
escaped, because the service which he can render to 
a buyev by a bowl has been, by the enterprise of his 
neighbor, just one half lessened. Value then follows 
the fortunes of services, and varies as they vary, just 
as much when they have been employed upon com- 
modities, as when they are independent of them, 
and we see that the value resides in services com- 
pared, and not in matter at all. 

I now proceed to indicate the manner in which 
language came to be used in such a way as gives 
color to the notion that value resides in the com- 
modities rather than in the services. An instance 
will bring the whole subject before us clearly. In 
many parts of the United States delicious wild 
strawberries may be had in their season for the 
simple picking. The pastures and meadows are 
open to every comer, and the strawberries are con- 
sidered to belong, not to the owners of the fields, 
but to any one who takes the labor of picking the 
fruit. Let us suppose that my family are fond of 



ON VALUE. 53 

the berries, and that no member of it likes to un- 
dergo the labor of picking them, and that I hire 
some girl, who offers her services for the purpose, 
to go to the fields and gather some of the fruit for 
us. When she returns I pay her for her service. 
She does not conceive of any value residing in the 
strawberries themselves. Neither do I. She makes 
a series of efforts for the gratification of my family, 
and is paid for her efforts. Language recognizes 
the true state of the case, and she does not say now 
that she sells us the berries, and we do not speak of 
buying the berries of her. She thinks only of her 
labor, we think only of her labor, she is paid only 
for her labor, and language is exact in the premises. 
The next day, as the girl is about to go for us again, 
my neighbor says to her, " You bring me as many, 
and I will pay you as much." The third day, a 
second neighbor makes a similar bargain with her, 
and she brings strawberries for the three families, 
and is paid in each case for her service. The girl, 
on the fourth day, taking it for granted that we shall 
be likely to want strawberries that day also, does not 
wait to be sent, makes no bargain for her services 
beforehand, but goes and gathers the fruit. This 
time there is a change of language when she comes 
to my door. She now offers to sell me straivberries. 
" How much are they worth ? " I ask. She names 
probably the same sum which she had before re- 
ceived for the service of picking the same quantity. 
She could not materially increase it, because there 
are doubtless other girls who are ready to render the 
service which she before rendered, at the same rate. 
But attention is now drawn away from the service 



54 ELEMENTS OF POLITICAL ECONOMY. 

to 'the berries, and the idea of value is attached to 
the berries, and language adopts the illusion, and 
says, " the berries are worth so much." Who does 
not see, however, that the transaction is substantially 
the same as before? Who does not see that it is 
only by a figure of speech, convenient indeed, but 
still only a figure, that the berries are now said to 
have value ? Is it not plain to reason that what the 
girl really sells in the last case, is just what she 
really sold in the former cases, namely, her service ? 
The only difference is that she retains in this case 
the proprietorship of her own service to a later stage 
of the transaction. In the earlier cases, the berries 
became mine as fast as she picked them ; in this 
case; they become mine only after she has picked 
them ; but this constitutes no difference in respect 
to that for which she is paid. The value, therefore, 
the purchasing-power, resides not in the berries, but 
in the service ; that is to say, in that which she ren- 
ders as compared with that she receives ; and it is 
only a freak of language which leads us to suppose 
otherwise. This is but a simple instance, but the 
principles of the instance are applicable to all com- 
modities whatsoever. It is only mediately and figu- 
ratively that commodities can be said to have value 
at all ; and if we use the common language, and 
say that they have value, we must always remem- 
ber that they have it simply and solely in conse- 
quence of the human services which have been 
employed upon them, and which may be subserved 
by them, as related to those other human services 
for which they may be exchanged. If this be true, 
and it seems to me certain that it is true, it throws 



ON VALUE. 55 

a flood of light upon the whole field of value. More 
attention must be given hereafter, in Political Econ- 
omy, to persons, and less to things. Man and his 
wants, man and his efforts, become at once the chief 
topics, while the material products on which efforts 
are employed, and which minister to wants, sink in 
relative position. It follows also from this distinction, 
that there is not so much difference as is commonly 
supposed, when a man works for others, and when 
he sets up for himself, — between a journeyman and 
a master. The journeyman sells his services, and 
the master sells nothing more or other than his own 
services. The services of the master may not be 
manual, they may be merely supervisory, or they 
may be connected with the use of his capital; but 
the finished product, when it is ready for the con- 
sumer, represents the aggregate of the human ser- 
vices which have been employed upon it, and whoever 
sells it, sells those services, and its ultimate value is 
determined, as all other value is, by a double com- 
parison, the purchaser's comparison of the service of 
the product to him with that which he renders, and 
the seller's comparison of the service he receives with 
that of the product. Service for service, in the last 
analysis, rather than commodity for commodity, is 
the rule of value and the law of exchange. 

It may be observed, in the fourth place, that a 
principal merit of the definition of value insisted on 
in this chapter, is the discrimination which it allows 
between utility and value. It is absolutely essential 
that these two ideas be not confounded. But they 
are confounded in all the earlier writers on wealth. 
The word wealth itself inextricably confounds them. 



56 ELEMENTS OF POLITICAL ECONOMY. 

Whole discussions in Adam Smith are marred by 
his not consistently attending to the distinction, 
which he himself draws in one place, between 
" value in use and value in exchange : " meaning 
by the former expression simple utility. Say mixes 
up the two ideas even more completely than Adam 
Smith does ; and the errors of the two writers in this 
respect gave rise to the twentieth, chapter of Mr. 
E-icardo's book,^ in which the difference between 
utility and value is pretty clearly unfolded. Mr. 
McCulloch, too, always insists upon this difference, 
and correctly maintains that the distinguishing char- 
acteristic of utility is, that it is gratuitous ; although 
the theory of value of each of these writers is too 
narrow, unduly restricting the field of Political Econ- 
omy by assuming that value rigidly inheres in com- 
modities only. The example of these writers shows 
that the distinction referred to can be made even un- 
der their definition of value, but it is not so easily and 
practically made as under the true definition, because 
in the true definition attention is inevitably drawn to 
two persons, instead of to one thing, and utility, which 
is simple capacity to gratify any desire, is neatly dis- 
criminated, even in the nomenclature itself, from the 
mutual efforts by which the mutual desires are met. 
The word service enables us to draw the distinction, 
and to hold it fast. 

Utility, then, is the capacity which any thing or 
any service has to gratify any human desire whatso- 
ever. Political Economy has nothing to do with 
the estimation in which different desires are held by 
a philosopher or a moralist. It is enough to consti- 

1 Principles of Political Economy and Taxation. 



ON VALUE. 57 

tute for it utility, if anything will meet anybody's 
desire or serve anybody's purpose. In this sense, 
which is the etymological and only just sense of the 
word, ardent spirits have utility just as wheat has 
utility. The same thing may have no utility for 
one man, a low utility for another, and a very high 
utility for a third ; since the first has no desire for it, 
the second a feeble, and the third a strong desire for 
it. Desires are personal to individuals. There is 
no common standard with which they may be com- 
pared. They are not exchangeable. Utility is the 
capacity which anything has of meeting any one of 
these desires at any time or in any place. But some 
things have this capacity in a high degree which 
are never exchanged, which are never bought or sold, 
and which consequently can have no value. The 
air we breathe, the light in which we recreate our- 
selves, the water we drink from the spring or brook, 
all have the highest utility, but no value. They 
connect themselves with no service. We give noth- 
ing for them. They, and such as they, are the 
direct gifts of God. They are gratuitous. Utility 
is, indeed, an element in all value, since it is an ele- 
ment in all service ; but the value is proportionate 
not to the utility, but to the human services. Let us 
recur to our illustration of the strawberries. The 
girl brings delicious strawberries to my door in sum- 
mer. Their utility is great, their capacity to gratify 
my palate and that of my family is exquisite, but 
her service in picking and bringing them is rela- 
tively little, and therefore it is little that I pay her. 
She cannot charge me one farthing for all that has 
been done for the fruit in the wonderful laboratory 



58 ELEMENTS OF POLITICAL ECONOMY. 

of Nature, — since Nature works for nothing; she 
can exchange with me her own service merely for an 
equivalent service which I may render to her. Her 
service having been employed upon that which de- 
rives its utility from Nature only, the two become, as 
it were, commingled, but the value is one thing, and 
the utility a distinct thing. The value has reference 
to her service, and is measured by it ; the utility has 
reference to the gratification of my family. The one 
has its birth mainly in efforts, the other in desires. 
Certainly the efforts would not be made were it not 
for the desires, but the desires and their gratification 
is one thing, and the efforts which mediate between 
them are another thing. Utility is ultimate : value 
is mediate. Utility is absolute with reference to the 
individual : value is always relative. Certainly we 
must believe that utility and value are different 
things, when we see some things, as air, possessed 
of the very highest utility and no value at all ; and 
other things, as strawberries, possessed of a very 
high utility and a very low value. 

The history of economy is full to a surfeit of the 
theoretical errors and of the practical blunders which 
have come from confounding value with utility ; and 
from not attending to the fact that all utility, until 
some human service has been mingled with it, is 
absolutely free. God is a Giver. He gives sunlight, 
and air, and water, in abundance. He gives the 
earth, with all its materials, and with all its powers, 
and with all its spontaneous fruits, gratuitously to 
man. At the very first, He gave to man, " dominion 
over the. fish of the seas, and over the fowl of the 
air, and over every living thing that moveth on the 



ON VALUE. 59 

earth." So far forth as these gifts minister directly 
to men's wants, there is utility indeed, but no value. 
But vsince, for the most part, human services are 
required to mould these gratuitous materials, J[o har- 
ness these gratuitous powers, to make these gratui- 
tous fruits and animals available for use, and since 
services for this purpose are exchanged among men, 
value springs up in connection with these utilities, 
but must not be confounded with them. The utili- 
ties, disengaged from the service, are free. God 
never takes pay for anything, and has not author- 
ized anybody to take pay in his behalf; what is paid 
for is the service of man, and not the bounty of 
Nature. Even the powers of Nature which men 
avail themselves of by machinery, such as water, 
wind, and steam, all work for nothing : water gravi- 
tates, and wind blows, and steam puff^, for nothing. 
These all, and such as these, help to create utilities, 
but they create no value. Value is in the service 
which makes the machine, and in the service which 
tends it, but in the power which moves it, unless 
that power be human muscle, there is no value. . 

Value must be carefully distinguished from Price. 
The price of anything is its purchasing-power ex- 
pressed in money ; the value of anything is its pur- 
chasing-power expressed in any other purchasing- 
power whatever. Price is a relative word, but spe- 
cific ; value is a relative word, but general. When 
we speak of the price of a service, we mean the 
sum of money which that service will buy; but 
when we speak of the value of a service, we mean 
the command in exchange of that service over other 
services generally. Thus, we say, " This coat is 



60 ELEMENTS OF POLITICAL ECONOMY. 

worth twenty -five dollars;" that is its price. The 
value of the same coat never could be completely 
expressed, because it would require a comparison not 
only with hats and gloves and boots and vests, but 
with all other things which are ever exposed for sale. 
Therefore, for convenience' sake, value is commonly 
reduced to price. By knowing the price of various 
things, we readily compare their value relatively to 
each other. Thus, when we know the price of the 
coat at 25 dollars, and of gloves at 2, of hats at 5, 
and vests at 10 dollars, we easily determine the 
value of the coat as estimated in gloves, hats, and 
vests, namely, that its value as compared with theirs, 
is respectively 12|-, 5, and 2| times theirs. The value 
of anything may remain nearly uniform while its 
price may greatly vary. At the present writing 
(1865), the prices of almost all commodities are 
about double the usual rate, because the currency 
of the country is about one hundred per cent, de- 
preciated ; but the value of these commodities, that 
is to say, their power of purchasing each other, is 
just about as it was before the depreciation be- 
gan. All other commodities have risen in relation 
to the one commodity, money; or, which is the same 
thing, money has fallen in purchasing-power in rela- 
tion to all other commodities ; and there is in conse- 
quence a universal rise of prices ; but it would be a 
total mistake to suppose that values have risen. A 
bushel of corn, now selling at two dollars, will buy 
no more labor, or hay, or cloth, than it used to buy 
when it sold for one dollar a bushel ; because the 
labor, hay, and cloth have risen in relation to money 
in the same proportion as the corn has ; while in re- 



ON VALUE. 61 

lation to each other no changes have supervened. 
Services and commodities, with few exceptions, ex- 
change with one another at the old rates, — value 
is unaltered ; but exchange for money at about 
double the old rates, — prices have risen. More- 
over it is not possible that there should be any gen- 
eral rise or fall of values, as there may be a general 
rise or fall of prices. A rise in the value of anything 
implies a fall in the value of those things with which 
you compare it ; that is to say, if it will buy more 
of thdm, they will buy less of it. Its rise in value im- 
plies their fall in value, and conversely. Every rise 
in value of any service involves a corresponding fall 
in other services; and every fall in value of any 
service involves a rise in value of other services; 
and therefore, a general rise or fall of values is im- 
possible. Nothing is more common than a rise or 
fall of value in particular services. Suppose, for 
instance, an improvement in machinery by which 
broadcloth can be made with one half the former 
effort, and that no change has been made in the 
efforts requisite to make the gloves, hats, and vests 
of our former example, and no change in the views 
of those who wish to exchange them. The coat 
will sink at once to about half its former value, not 
only in relation to gloves, hats, and vests, but in re- 
lation to everything which does not happen to be 
affected by a similar depressing cause. It is cor- 
rect to say that the value of the coat has fallen. As 
estimated in gloves, hats, and vests, its value now is 
only 6.J, 2h, and 1^ times theirs, respectively. But 
while coats have fallen in relation to the other com- 
modities, the other commodities have risen in rela- 



62 ELEMENTS OF POLITICAL ECONOMY. 

tion to coats ; and if gimilar improvements should 
be made in the machinery by which gloves, hats, 
and vests are made, so that one half less effort will 
bring these also to market, views of parties as before 
remaining unchanged, they will exchange now for 
coats exactly in the same ratios as at first, namely, 
12|, 5, and 2|-, respectively, for 1. As soon as the 
improvements affect all the commodities equally, 
value stands just as it did before the first improve- 
ment was made. Views of the parties remaining 
the same, it is only an advantage or disadvantage 
affecting some services and not others, that will 
vary their value in exchange : whatever affects them 
all equally will have no effect upon value. Thus, a 
universal rise of wages in any country, provided they 
rise in all departments of effoYt equally, will have 
not the least effect upon value ; and we have just 
seen that a universal rise of prices at present ex- 
perienced in this country, has no effect whatever 
upon the general purchasing-power of services in 
exchange, but' is only a token that the one com- 
modity, money, has fallen relatively to them. 

It only remains in this elementary discussion of 
value to inquire whether there is, or can be, any 
measure of value — any standard, by a comparison 
with which we may determine the general purchas- 
ing-power of different services. It has commonly 
been supposed that there is such a measure, and 
political economists have expended a great deal of 
strength in endeavoring to discover what it is. The 
results have hardly been commensurate with the 
zeal and patience of the search. Adam Smith 
seems at one time to regard labor as the best meas- 



ox VALUE. 63 

ure of value, that is, the quantity of labor wliich any 
commodity will buy as the best gauge of its power 
to buy commodities in general. At another time he 
seems to think that corn is a better measure of general 
exchange value than labor. Others have thought 
that price furnished the best attainable standard of 
comparison ; in other words, that the quantity of 
gold or silver which anything will purchase, will best 
enable us to determine the quantity of all other 
things which it will purchase. Others still have 
supposed that the cost of production of any com- 
modity would give the most accurate rule by which to 
decide the value of the commodity, that is, the degree 
of its command over purchasable articles generally. 
But the truth is, a measure of value in the sense in 
which it has been sought after by these writers, is 
something impossible to be realized. It never would 
have been sought after, unless value had been sup- 
posed to be a rigid quality inhering in commodities, 
and, when once placed in them by whatever process, 
to be invariable. We have seen, however, that value 
is not a quality inhering in anyone thing, bat is 
a relation subsisting between two services which 
two persons are in a position to render to each other; 
and that this is not an inflexible relation, but is vari- 
able by any change in the views of the two persons, 
by which either of them puts a different estimate 
upon the service about to be rendered as compared 
with the service about to be received. We have 
seen sufficiently already, that there are four things, 
and only four, any change in any one of which will 
vary value ; and that these four things are two de- 
sires and two efforts, the two desires belonging to 



64 ELEMENTS OF POLITICAL ECONOMY. 

two persons, and the efforts made by two persons 
each for the other. Now these four elements are in 
their very nature so liable to vary, and as a matter 
of fact do so constantly vary, that no man who 
clearly perceives what value is, will waste time and 
ingenuity in searching for an invariable standard of 
that which in its nature is variable and relative. 

But while no reliable measure of value is possible 
to be found, there are certain limitations and princi- 
ples of much importance which ought to be given 
in this connection. Since the foundation of value 
lies partly in the effort made by the person serving, 
and partly in the effort saved to the person served, 
and since in every exchange each of the parties is 
reciprocally serving and served, the outermost lim- 
itations of value are easily seen. A and B will not 
exchange services, unless the effort which each ren- 
ders to the other is less onerous than the effort which 
each would have to make if each served himself di- 
rectly. It costs a certain effort for me to bring water 
from the spring ; I am willing to pay a neighbor for 
bringing it for me, but I should not be willing to 
make a greater effort for him in return than the ef- 
fort is to bring it myself ; neither should I be willing 
to make an effort for him which I regarded just as 
onerous as the bringing the water: unless there is 
some service which he will accept less onerous to 
me than that, I shall continue to bring the water for 
myself. On the other hand, he will not render the 
service to me of bringing the water, unless it be less 
onerous to him than the doing that for himself which 
I am ready to do for him. This principle, applica- 
ble to all exchanges whatsoever, draws on the one 



ON VALUE. 65 

side the outermost line, beyond which value never 
can pass. It may be asserted with confidence that 
no man will ever knowingly make a greater effort to 
satisfy a desire through exchange, than the effort 
needful to satisfy it without an exchange. More- 
over, within this outermost limitation which is made 
by the comparative onerousness of the respective ef- 
forts, there is a second limitation of a similar kind. 
To pursue the same illustration, while I should 
never make an effort for another in return for his 
bringing the water, greater than that required to 
bring it myself, the return effort may be very much 
less than that effort, and may sink down to a point, 
below which I can get no one to bring the water 
for me. Suppose I estimate the effort required to 
bring the water myself as 10 ; and that there are 
several persons who would be glad to do that service 
for me for a return service which I estimate as 8 ; 
and that there are two persons who are willing to 
do it for something which I estimate as 6 ; and that 
there is only one person who will do it for a return 
service which I regard as 5. It is evident that the 
extreme limits of the value of that service to me are 
10 and 5. Higher than 10 it cannot go, lower than 
5 it cannot sink. I should render the service esti- 
mated as 8, rather than forego having the water 
brought for me ; but I shall render the service esti- 
mated as 5, just as long as there is any one person 
who will make the exchange with me on those terms. 
If he declines the exchange, I fall back on one of 
the two persons in the class above him, and value 
rises now from 5 to 6. It will be steadier at 6 than 
it was at 5, because there are two persons ready to 



66 ELEMENTS OF POLITICAL ECONOMY. 

render the service at that rate. If each, however, in 
turn should give out, I should then be obliged to fall 
back upon the larger class ready to serve nie for a 
return service of 8. At this point the value would 
be very steady from the presence of numerous cora- 
petetors anxious to serve me at that rate, and it 
could by no possibility rise above 10. Between 10 
and 5 the value may fluctuate, but it cannot over- 
pass these limits in either direction. Therefore we 
may say that the maximum value of any service in 
exchange is struck at the point where the recipient 
will prefer to serve himself, rather than make the ex- 
change ; and the minimum value of any service in 
exchange is struck at the point below which the re- 
cipient cannot get himself served. These two limits, 
it will be observed, are found in the two elements 
which we have called efforts. 

But there are also limitations of value in the two 
elements which we have called desires. In the fore- 
going illustration, it is supposed that my desire for 
the water is all the while of uniform strength, and 
the desire of each of the three classes willing to serve 
me for the return service is uniform also, though 
each class maizes a different estimate of the compar- 
ative efforts. Let us now suppose that the efforts 
on either side remain invariable, but there is a 
change in the element of desire. Any capacity in 
anything to gratify any desire of anybody is utility. 
For simplicity's sake, let us look only to the one 
man who was ready to bring the water for a return 
service which I estimated as 5, and suppose that he 
is the only man who will do me the service on any 
terms. Let now the utility of the water to me be 



ON VALUE. 67 

increased, and let him know that fact, all other ele- 
ments remaining as before, and he can crowd up 
the value of his service towards 10, according to the 
intensity of my desire. Of course he cannot crowd 
it over 10, but the limit below that will now be de- 
termined by the relative strength of my desire. On 
the other hand, if my desire be as before, and the 
two efforts as before, and his desire for my return 
service be increased, and I know it, and I the only 
man who can render him such a service, I can crowd 
down the value of his service below 5, according to 
the intensity of his desire. Of course I cannot 
crowd it down below a point, which we will call 3, 
at which, rather than continue his service at that 
rate, he will forego the exchange altogether. But 
value may vary between these limits, 10 and 3, ac- 
cording to the varying intensity of our mutual de- 
sires. If it should so happen that both these desires, 
my desire for his service and his desire for mine, 
should increase simultaneously and proportionably, 
value would not be affected ; the exchange would go 
on at the same rate as before. Or if both desires 
should diminish simultaneously and proportionably, 
value would not be affected. The same is true of 
efforts. If both efforts suddenly become twice as 
onerous, or twice less onerous, than before, the de- 
sires remaining the same, the value of the two ser- 
vices estimated in each other would stand just as 
before. Thus we see that the natural limits of value, 
and all the variations in value, are to be sought for 
and will be found in the play and interaction of the 
four elements out of which value itself springs. 
We shall now be able to understand clearly what 



68 ELEMENTS OF POLITICAL ECONOMY. 

is meant by Market- Value and its variations, and 
also the action of Supply and Demand. Market- 
Value is the rate at which services of all sorts are 
exchanging at the present time in the various de- 
partments of society. What determines that rate ? 
What deterlmines that corn is now selling in the 
market for two dollars a bushel ? Two desires 
come in to determine it, — the desire of people for 
corn, and the desire of farmers for money. Two ef- 
forts come in to determine it, — the effort of farmers 
to raise and bring a bushel of corn to market, and 
the effort of people to secure two dollars in money. 
The presence of corn in the market, or its being 
ready to be immediately brought there and offered 
in exchange for money, constitutes what is called a 
Supply of corn ; money offered, or ready to be of- 
fered, in exchange for corn, constitutes what is called 
a Demand. This is commercial language, and is 
sufSciently accurate, although it must be remem- 
bered that each commodity in reality constitutes a 
Demand for the other, and is a Supply in reference to 
the other. But, speaking commercially, the money 
ready to be offered for commodities is the Demand, 
and the commodities ready to be exchanged for 
money are the Supply. What, then, is the law of 
market-value? The law of market-value is the 
equation of supply and demand : that is to say, the 
rate of the exchange is adjusted when money enough 
is offered to take off within the usual times the 
commodities on hand. Demand and supply are 
thus equalized, and the current market-rate is deter- 
mined. If demand for any reason becomes quick- 
ened, and the supply not increased, there is compe- 



ON VALUE. 69 

tition among buyers for the stock in market, and 
market-value tends to rise. If demand becomes 
sluggish, the supply remaining the same, there is 
competition among sellers to dispose of their stock, 
and market-value tends to sink. So far it is the 
action on value of the element of desire, which ex- 
presses itself through demand. How far can this 
action go ? Demand being increased, supply re- 
maining the same, value rises : how far does it 
rise? In the ratio of the increased demand, say 
some ; if the demand be one third increased, the 
value will be one third higher. By no means is this 
true. The value may rise far higher than that pro- 
portion, or it may not rise in anything like that pro- 
portion. It depends upon circumstances, and upon 
the nature of the commodity. We must remem- 
ber that demand not only acts upon value, but value 
acts upon demand. As value rises, the number of 
those whose means or inclinations enable them to 
purchase at the new rate is constantly diminished. 
There are ten persons who may wish an article at 
one dollar, of whom not over four will wish it at 
two dollars, and perhaps only one at three dollars. 
Every rise in value then, under the influence of in- 
creased demand, tends to cut off a part of that de- 
mand, that is, to lessen the number of those who 
will purchase at the increased price ; and the value 
will rise only to that point, whatever it be, where an 
equalization takes place between the supply and de- 
mand, between the quantity of corn, for example, 
offered at the enhanced rates, and the quantity of 
money in the hands of those willing to exchange it 
for corn at the enhanced rates. Thus we see that 



70 ELEMENTS OF POLITICAL ECONOMY. 

every rise or fall of demand, and the consequent 
rise or fall of value, tends to check itself. An in- 
creased demand for any article or service, other 
things being equal, enhances its value ; but the en- 
hanced value in turn lessens the demand by lessen- 
ing the number of those who will purchase, and the 
new market-rate is struck at the point of equaliza- 
tion between the old supply and the new demand. 
Just so, if demand is slackened, value declines ; but 
declining value in turn increases the demand by 
bringing the article within the range of a larger 
number of purchasers, and the decline is arrested at 
the point of equalization between the new demand 
and the old supply, and a new market-rate is deter- 
mined. Everything oscillates under the variations 
of demand, but the point of stable equilibrium, if I 
may use the expression of anything so unstable as 
market-value, the point of stable equilibrium is 
always the equation of supply and demand. 

In the preceding paragraph we have supposed 
supply to remain unchanged, and have followed the 
law of value through the variations of demand, 
which, money being invariable, as is here supposed, 
expresses the element of desire. Supply expresses 
the element of efforts, and market-value varies with 
the variations of supply. We have seen that every 
rise or fall of demand tends to check itself, and will 
check itself even without variations in the supply ; 
but it is commonly checked at an earlier point by 
variations in the supply. A brisk demand enhances 
value, and enhanced value commonly stimulates sup- 
ply, and increased supply checks the rise. A slack 
demand lowers value, and lowered value commonly 



ON VALUE. 71 

lessens the supply by the action of holders and spec- 
ulators, — holders withdrawing their stock for a bet- 
ter market, and speculators buying now when the 
article is cheap, to store away till it shall be dearer. 
Thus rise of value from increased demand is doubly 
checked ; fii'st, by restricting the number of purchas- 
ers, and second, by increasing the supply : the fall 
of value from slack demand is doubly checked ; 
first, by enlarging the number of consumers of a 
now cheaper article, and second, by diminution of 
supply by the action of holders and speculators. 
This law of the equalization of demand and supply, 
thus doubly and harmoniously working, is perhaps 
the most comprehensive and beautiful law in politi- 
cal economy. But we must note the action on value 
of changes in supply only, demand continuing 
steady. If the supply be short, and cannot be in- 
creased at all, as is the case with choice antiques and 
certain gems and paintings by the old masters, value 
may rise to any point, and will be struck, as before, 
at the precise point of equality of the demand then 
existing with the supply there offered. The French 
government paid, in 1852, 615,300 francs for a paint- 
ing by Murillo, which had belonged to Marshal 
Soult. The genuine Murillos are comparatively 
few, and their number cannot be increased, and 
their merit causes a strong desire to possess them, 
and their value rises in consequence of the limita- 
tion of supply to a point beyond which no one pur- 
chaser can be found. When this painting was 
offered in Paris for sale, many parties were anxious 
to purchase it, but the equation of demand and sup- 
ply was reached, and its value was determined only 



72 ELEMENTS OF POLITICAL ECONOMY. 

when one party distanced all other competitor3 
and offered a sum greater than any one else would 
give. There was one painting; there could be but 
one purchaser ; value rose under the influence of 
demand, and could not be checked by increase of 
supply ; and the equation was complete when the 
demand was practically restricted to one party, and 
that the highest bidder. The same principle controls 
all sales of this sort. 

If the supply, instead of being absolutely limited, 
can only be increased with difficulty, or after the 
lapse of time, similar but less extreme results will be 
observed. Suppose pianos are selling in any com- 
munity at $300 each, and there are twenty persons 
in that community who wish a piano immediately, 
and that there are but fifteen pianos on hand, and the 
number cannot be increased for six months. The 
value will rise above $300. How much above ? To 
that point, whatever, it be, at which only fifteen of 
the twenty will be willing to purchase at the new 
rate. The equation of supply and demand will be 
reached by a rising value which cuts off five com- 
petitors. This is the principle, working only roughly 
indeed in practice, — working only by the estimates 
and good judgment of dealers, — but the principle 
is this. A better illustration of this class of cases is, 
perhaps, the grains and other products of the earth. 
When these have been gathered there is no more 
home supply for a year. Any deficiency in the 
crops will raise their value, not at all in the ratio of 
the deficiency, but according to the relations of the 
diminished supply to a new demand. It will de- 
pend on the facility of importation, and other causes. 



ON VALUE. 73 

but it has frequently happened that an estimated de- 
ficiency of crops amounting to one third has doubled 
and even quadrupled the usual prices.^ 

In the only remaining, and far more numerous 
class of cases, in which the supply of commodities 
and services can be readily and indefinitely increased, 
every rise and fall of value is speedily checked by 
the action of supply ; and the comprehensive and 
harmonious law already referred to keeps value in 
this class of cases comparatively steady. 

The general theory of value has now been given. 
While we shall find no case of value, or its varia- 
tions, which this theory does not cover and explain, 
we shall find particular vprinciples which act in cer- 
tain cases upon demand and supply, and thereby act 
upon value. We have now seen what value is ; how 
it arises ; the elements which alone can vary it ; and 
the universal law which limits it. 

1 Tooke's History of Prices. Quoted by J. S. Mill. 



74 ELEMENTS OF POLITICAL ECONOMY. 



CHAPTER IV. 

ON EXCHANGE. 

The strength and safety of our conclusions in 
Political Economy are derived from the simplicity 
and certainty of the forces at work. No man has 
ever denied the great facts that lie at the basis of 
exchange. That men are possessed of desires, that 
efforts are necessary in order to meet these, and that 
satisfactions are the result, are propositions univer- 
sally admitted. From these simple truths spring all 
the laws of our science, and all the economical har- 
monies of society. Let me remind my readers that, 
while the desires and satisfactions are experienced 
by one and the same person, and from their very 
nature cannot be communicated to another, this is 
not at all true of efforts. Efforts are exchangeable. 
One man may and does put forth the effort neces- 
sary for the satisfaction of another man's desire. 
But since the effort is not for himself but for another, 
and since to put forth efforts is not naturally agreea- 
ble to man, and never becomes so, except in con- 
nection with the satisfaction to which they minister, 
he will demand for his effort some corresponding 
effort made for him. This is a simple fact. No 
man will work for you for nothing. If you think he 
ought to, there is no law against your trying to in- 
duce him to do so. 



ON EXCHANGE. 75 

How now does it happen that society is one vast 
hive of buyers and sellers, every man bringing some- 
thing to the market and carrying something off? We 
speak of the commercial classes, but all classes are 
commercial. Everybody exchanges. You do some- 
thing for me, and I will do something for you, is the 
fundamental law of society. From this results the 
division of employments, and all the various profes- 
sions. Every man brings his own product and ex- 
changes with society as best he may. The farmer 
brings his produce — and exchanges. The mechanic 
brings the product of his skilled labor — and ex- 
changes. The laborer brings his strength, and the 
teacher his knowledge, and they are ready to do ser- 
vice — for a consideration. The merchant, the phy- 
sician, the lawyer, the clergyman, the editor, the 
lecturer, the singer, the actor, and so on to the end 
of the list, are all in position to render services to 
society, and justly expect to receive an equivalent 
service in return. Indeed, when we look out upon 
society, the most striking thing we observe about it 
is, that these exchanges are going on, in a thousand 
directions at once, determining all employment and 
professions, reaching everywhere and permeating 
everything, and all this the more rapidly and per- 
fectly as knowledge and civilization advance. Since, 
therefore, as a matter of fact, men do constantly put 
forth onerous efforts to satisfy other men's desires, 
in order to receive back from them the results of cor- 
responding efforts in return ; since this mutual ex- 
change of services is everywhere present in society, 
not in the market-places only, but in every depart- 
ment of life, there must be in this exchange some 



76 ELEMENTS OF POLITICAL ECONOMY. 

great gain. We now inquire particularly what this 
gain is. What is the motive that leads men univer- 
sally to exchange ? 

The answer to these questions will bring us to the 
gratifying conclusion that the laws of exchange are 
based on nothing less solid than the will of God. 
The desires of men are not only various in kind and 
indefinite in degree, but also tend to increase in 
variety and extent by the progress of knowledge and 
freedom. To the • gratification of almost all these 
desires, however, there are obstacles interposed, some 
of which are physical and some moral ; and these 
obstacles are so great in all directions, that the pow- 
ers of the individual man are utterly incompetent to 
surmount them. They mock at his weakness, and 
throw him back upon his destitution. Without 
association with his fellow-men, there is no creature 
so helpless, so unable to reach his true end, as is 
man ; and therefore it is, that the impulse to associ- 
ation is one of the strongest of our natural impulses. 
Men come together, as it were by instinct, into soci- 
ety ; and, associating themselves together in a soci- 
ety, it is very soon discovered, not only that there 
are various desires in the different members of the 
community which are now readily met by coopera- 
tion and mutual exchange, but also that there are 
very different powers in the different individuals in 
relation to those obstacles which are to be sur- 
mounted. There is a vast diversity in natural gifts. 
One man has physical strength, with no mechanical 
ingenuity ; another combines with a feeble body a 
wonderful knack for contrivance ; a third has a 
philosophical turn, liking to examine into the laws 



ON EXCHANGE. 77 

of nature ; and a fourth has a bent and genius for 
traffic. Now, then, Nature speaks in this diversity 
of gifts in as loud a voice as she can utter, in favor 
of such a degree of association and exchange as shall 
allow a free development of these varying capacities, 
while they work upon the obstacles to the gratifica- 
tion of men's wants which are appropriately oppo- 
site to them. Mr. Carey is right in his principle that 
the degree of individuality depends on the degree of 
association, each advancing hand in hand with the 
other; but he seems to me to be wrong while he 
lacks confidence in the natural forces at work tending 
to the highest degree of association and consequently 
to the highest degree of individuality. There is no 
social force stronger than interest, and interest is 
driving society continually to exchange, and to a 
wider and wider application of the principles of ex- 
change, thg^t is to say, to a higher arid higher degree 
of association, which allows of course a continually 
freer development of individuality. When interest 
fails as a motive power, at least in this department, 
it is vain to appeal or to trust to an inferior and fac- 
titious motor. 

It is interest that leads men to exchange. It is 
because a given effort put forth for another, in view 
of a return, realizes more of satisfaction than when 
put forth directly for one's self, that exchange ever 
takes place. Why does it realize more ? Because 

THERE IS DIVERSITY OF ADVANTAGE BETWEEN DIF- 
FERENT MEN AND BETWEEN DIFFERENT NATIONS, IN 

DIFFERENT RESPECTS. All exchauge depends on 
diversity of relative advantage; and diversity of rela- 
tive advantage exists by God's appointment among 



78 ELEMENTS OF POLITICAL ECONOMY. 

individual men, and aniong the nations. Reserving 
this national diversity for a later discussion, it is 
very clear that a diversity of advantage in different 
things displays itself as between the individuals of 
every community large and small. There is no 
village in which one man has not an advantage over 
his neighbors in the making of coats, another in the 
shoeing of horses, another in the curing diseases, 
another in the keeping a school ; while each of those 
neighbors may have an advantage over each of these 
in some other art or avocation. This diversity of 
advantage in various directions depends, in every 
advanced state of society, partly upon diversity of 
original gifts, partly upon concentration of personal 
effort upon the one set of obstacles that lie in the 
path of a single branch of business, and partly upon 
the use, and familiarity in the use, of the gratuitous 
forces of nature which lend their aid towards over- 
coming these obstacles. As the result of one or two 
or all of these, one man comes to have a legitimate 
advantage over others in his own branch of business, 
whatever it is ; and the others come to have a legiti- 
mate advantage over him in their own branches of 
business, whatever they are; and if he has desires 
which their efforts can satisfy, and they desires which 
his efforts can satisfy, nothing more is necessary to 
a profitable exchange between them than this rela- 
tive advantage at difi'erent points. The tailor and 
blacksmith can profitably exchange their respective 
efforts just as soon as each has a relative superiority 
to the other in his own trade, provided of course each 
has a desire for the product of the other ; and the 
greater the relative superiority of each to the other, 



ON EXCHANGE. 79 

the more profitable is the exchange to both. This is 
a point of considerable consequence, and will repay 
some pains in illustration. If the blacksmith can 
shoe horses only a little better than the tailor could 
shoe them, and the tailor make coats only a little 
better than the blacksmith could make them, there 
will be only a slight advantage in their mutually ex- 
changing efforts. For the sake of definiteness, let us 
say, that the tailor's capacity in making coats is 6, 
and his capacity in shoeing horses is 5 ; and the 
blacksmith's capacity in shoeing horses is 6, and his 
capacity in making coats is 5. Each has a relative 
superiority to the other of 1, and if they exchange, 
there is an advantage of 2 to be divided between 
them. Now let us suppose that each, by exclusive 
devotion to his own trade, by developing his latent 
skill and ingenuity, and by availing himself of all the 
forces of nature at his command, comes to have a 
capacity in his own business of 15, his capacity in 
the other business remaining as before at 5. Each 
now has a relative superiority to the other of 10, and 
when they exchange there is an advantage of 20 to 
be divided between them. The motive to an ex- 
change, and the gain of an exchange, are ten times 
gi'eater than they were before. Therefore we lay 
down the principle, as universally* applicable to all 
exchanges, that the greater the relative superiority 
at different points, the more profitable do exchanges 
become. If this principle is just, and I flatter myself 
that it will be found to be just, it follows, that every 
man who has anything to exchange, is directly inter- 
ested in the success of his fellow-citizens, that every 
trade finds its advantage in the increasing develop- 



80 ELEMENTS OF POLITICAL ECONOMY. 

ment of other trades, and that all discoveries and 
inventions by which Nature is made to pay tribute 
to any art is, restrictions apart, so much clear gain 
to the world at large. In the light of sound princi- 
ples, what has been sometimes called the jealousy of 
trade is simply silly. 

All exchange, then, depends on difference of rela- 
tive advantage, because without some difference of 
relative advantage, each party could serve himself 
directly just as well as he could be served by the 
other party, and there would be no motive at all for 
an exchange. As soon as there is any difference of 
relative advantage, there begins to be a motive for an 
exchange, and a gain as the result; and the motive 
amd the gain become stronger and greater as the dif- 
ference increases ; so that the gains of exchange are 
the greatest in that state of society in which the 
freest opportunity is allowed to every individual to 
employ his peculiar powers in work for which he is 
best fitted, in which desires are so various and em- 
ployments so diversified as to give a chance for all 
kinds of efforts, and in which men avail themselves 
to the utmost of those natural advantages and gra- 
tuitous powers which lie open to their disposal. 
Freedom, association, and invention, are the three 
things which make exchanges as profitable as they 
can become, and which will carry society, so far as 
exchanges can do it, to the highest pitch of prosper- 
ity. Of these by far the most important is freedom, 
because, where freedom is conceded, association and 
invention follow in time bylaws of natural sequence. 
By freedom is meant the right of every man to em- 
ploy his own efforts for the gratification of his own 



ON EXCHANGE. 81 

wants, either directly or through exchange. Each 
man's right of freedom is limited of course by every 
other man's right of freedom which he is not at lib- 
erty to infringe ; and also, in certain respects, by what 
is called the general good, of which the judge must 
be the government under which he lives. Under 
these limitations, which limit in common all other 
rights, the right of exchange is just as much of a 
right as the right of breathing. It stands on the 
same unassailable ground. Every man has a nat- 
ural, self evident, and inalienable right to put forth 
efforts for his own well-being ; and whenever two 
men find that by exchanging efforts with each other, 
they can better promote their own happiness, they 
have an indisputable right, subject only to the above 
limitations, to exchange ; and it is a high-handed in- 
fringement of natural rights, a blow aimed at the 
life and source of property, when any authority 
whatever interferes to restrict or prohibit the free- 
dom of exchange, except that act be justified by a 
solid proof that other private or public rights which 
are as well based as the right of exchange are in- 
fringed thereby. 

Happily, since governments have become more 
enlightened than formerly, they perceive for the most 
part that they have no right to interfere with this nat- 
ural right of their people, and also, that, by interfer- 
ing with it, they would do them an incalculable in- 
jury. The only motive to a mutual exchange of 
services, is always and everywhere the mutual benefit 
of the parties. After every fair exchange, each party 
is richer than before, has more satisfactions, otherwise 
there would be no exchange. I esteem the service 



82 ELEMENTS OF POLITICAL ECONOMY. 

I receive more highly than the service I render, oth- 
erwise I should not render it. The man to whom I 
render it esteems that service more highly than the 
service he renders to me. We are both gainers. 
And since almost everybody in every community 
has something to exchange, — either service or com- 
modity, and nobody exchanges except in view of a 
gain, it is clear that free exchange benefits every- 
body, and harms nobody. Moreover, under a system 
of free exchange, every man is allowed, under the 
stimulus of self interest, to follow the bent of his 
own mind, to work away at those obstacles to the 
gratification of human desires which he feels him- 
self best able to overcome, and to avail himself of 
all those helps in his work, of which Nature offers to 
him a full store. Under these circumstances, obsta- 
cles give way in all directions : the amount of mate- 
rial products produced and offered for exchange is 
vastly augmented ; the number and variety and 
excellence of the services proffered is indefinitely 
increased; the diversified and rapidly increasing de- 
sires in such a community are readily met by ex- 
change; all peculiar facilities are taken advantage of, 
and the difference of relative advantage becomes 
great in all directions, and a new day of industrial 
and commercial prosperity is ushered in. Under 
freedom all men have the greatest possible motive 
to produce, because they can dispose of their efforts 
to the best advantage. They can purchase with 
these efforts what they will, and when they will, and 
where they will. Thus freedom leads to extended 
association, and, speedily also, to the invention of 
machinery and all labor-saving appliances. There- 



ON" EXCHANGE. 83 

fore, since free exchange indefinitely multiplies, in 
number and variety, the services which men may 
render to each other ; since, by means of it, men's 
satisfactions bear a larger and larger proportion to 
their efforts ; and since the only possible motive 
to an exchange is a mutual benefit of the parties, 
no reason can be given, no good reason ever has 
"been given, why exchanges should not be the freest 
possible. 

After long centuries of meddlesome and vexatious 
interference with the freedom of industry and the 
rights of exchange, by limiting the number of ap- 
prentices to each artisan, by dictating what should 
and what should not be manufactured or grown, by 
attempting to determine what should and what 
should not be imported and exported, and by arbi- 
trary burdens on certain classes, and arbitrary privi- 
leges granted to others, the more enlightened nations 
of the world have come at length to perceive that 
wealth and power and progress are dependent on 
free exchange, at least within their own boundaries. 
Common sense reigns now, for the most part, in this 
thing, within the limits of the individual nations. 
When Bonaparte brought half of Western Europe 
under French dominion, the previously existing cus- 
tom-houses and toll barriers of the interior fell as by 
a stroke, and free trade became the rule between 
French, Dutch, Germans, Italians, and Spaniards, — 
all who were subject to his sway. But when his 
vast empire was dissolved into its original independ- 
ent kingdoms, up shot the custom-houses again, 
around all the petty frontiers, and each State was 



84 ELEMENTS OF POLITICAL ECONOMY. 

busy to reirapose on itself the fetters which his 
powerful hand had broken.^ Just as if the bene- 
fits of exchange depended on the accident that the 
parties to it are subjects or citizens of the same gov- 
ernment ! 

Opposed to free exchange are monopolies. A 
monopoly is a legal restriction imposed by the gov- 
ernment upon the sale of certain services or commodi- 
ties. This restriction is ostensibly laid for the bene- 
fit of certain persons or classes, and limits of course 
the competition to which they would otherwise be 
subject in their business, and tends therefore arti- 
ficially to raise the value of that which the privi- 
leged few offer for sale. If the view be limited to 
these persons alone, monopolies would certainly 
seem to be advantageous, but what of the purcha- 
sers and consumers of their wares ? They all are 
obliged to pay a higher price for what, were it not 
for the monopoly, they could obtain at a cheaper 
rate, since the only object in laying the restriction, is 
to enhance the price for the benefit of those possess- 
ing the privilege. Monopolies, therefore, infringe the 
right of exchange, are unjust and odious in their 
nature, and are in practice abominable. Nearly all 
governments have been chargeable, at times, with 
successful attempts to make things thas artificially 
dear to the mass of the people. Queen Elizabeth 
called the power of granting patents of monopoly to 
her favorites " the fairest flower of her garden." To- 
wards the close of her reign, her abuse of this power 
had reached an intolerable height, and some of the 
most necessary articles of life, such as salt, iron, 

1 Senior. Page 177. 



ON EXCHANGE. 85 

calf-skins, vinegar, lead, paper, and many others, 
were in the hands of patentees, and could only be 
procured at exorbitant prices. In 1601, the House 
of Commons met in so angry and menacing a mood, 
in consequence of this abuse, that Elizabeth was 
obliged to promise at least, that the monopolies com- 
plained of should be abolished. Up to 1834, tea 
was a close monopoly in England, in the hands of 
the East India Company. To this day tobacco is a 
government monopoly in France. Salt and opium 
have been, and for aught I know still are, monop- 
olies in British India. For governments to confer 
a power of this sort on an individual, a company, 
or any set of persons so few as to enable them 
to combine, is to give them a power to levy any 
amount of taxation on the public, for their own 
especial benefit, which will not compel the public to 
forego the use of the monopolized article. Monop- 
lists, however, do not find it for their interest to 
crowd up the price beyond the reach of the mass of 
the ordinary consumers, especially if they can com- 
mand a full supply, because their aggregate income 
would be lessened by the falling off" of buyers from 
the highest price. They adjust the price at that 
point at which they suppose they will realize the 
largest aggregate gains ; a price which is still con- 
siderably above what it \<^ould be under free ex- 
change ; otherwise the monopoly would be of no 
benefit to them. 

A second form of monopoly is that in which gov- 
ernments by prohibitory duties exclude foreign com- 
petition in certain articles, leaving the domestic deal- 
ers open only to home competition. One of two 



86 ELEMENTS OF POLITICAL ECONOMY. 

things is sure to follow upon such exclusion. It 
sometimes happens the hope of extra gains from 
dealing in an article whose foreign supply is thus 
prohibited, seduces capital and labor from other prof- 
itable channels and concentrates them upon this busi- 
ness ; and the home competition, thus artificially 
stimulated, becomes feverish and intense, and the 
whole business is overdone, and they in whose behalf 
the prohibitory duty was laid, have reason to pray to 
be delivered from their friends. Their profits for a 
time sink below the current rate from the eagerness 
of others to share in their expected gains ; the weaker 
houses are ruined, and an element of distrust and 
unsteadiness is introduced into the whole business. 
Only the stancher firms weather the depression 
consequent upon overdoing, and they will now con- 
trol the market for a time at a monopoly price. But 
their prosperity has been purchased at too dear a 
rate ; the losses of home competitors, and of those 
who would otherwise have been foreign competi- 
tors, and of those who would have exchanged with 
those foreign competitors, but whose market is 
also cut off by the duty, overbalance many fold these 
factitious and precarious gains. This series of re- 
sults has several times been witnessed in this country 
under the stimulus of high protective duties, as, for 
instance, in the iron business after the tariff of 1842. 
More commonly, however, competition is less active 
after the foreign competitors have been thrust off; 
those who are in fair possession of the home field 
control the markets at a monopoly price. Relieved in 
great measure from the stimulus of competition, the 
manufacturers and dealers are less on the alert for 



ON EXCHANGE. 87 

improvements and inventions, they are less attentive 
and compliant to their customers, and the consumers 
are obliged, not only to pay a tax levied for the ben- 
efit of the monopolists, but also an additional tax 
on account of their want of enterprise and spirit. 
At this present writing, there is in this country a vir- 
tually prohibitory duty on foreign paper, and the 
few paper-makers are not only growing immensely 
rich out of their monopoly, but are able so to com- 
bine and influence the action of Congress, that a 
very popular and widespread combination among 
paper users to induce Congress to lower the duty, is 
likely to founder on the single opposition of the 
paper-makers. A similar monopoly is enjoyed by 
the manufacturers of carpets. This form of injustice 
cannot abide a fair and full discussion. It is bound 
to disappear with other abuses of the past. 

Very different in character is the third form of 
monopoly, that involved in the granting of patent- 
rights and copyrights. That the originator of an 
improved process should enjoy for a limited time the 
sole right to employ and to sell his improvement, is a 
very proper way to compensate him for the thought, 
the pains, the expense, involved in his invention. 
This mode has the merit of graduating the compen- 
sation according to the real benefits of the invention. 
The same is true of copyrights. Society does well 
in protecting by law inventors and thinkers in the 
sole use of their respective productions for a limited 
time. Otherwise men would have less motive to 
think and to invent; since in that case only the 
public spirited and the rich would or could devote 
themselves to an important branch of the public 



88 ELEMENTS OF POLITICAL ECONOMY. 

progress. A patent or copyright is merely a return 
service which society renders for a service received. 
It violates no man's right of property, as an ordinary 
monopoly does, but is a provision to protect a right 
of property. In the United States a patent right ex- 
tends for fourteen years, and may be in certain cases 
extended further by the Commissioner of Patents, 
or by act of Congress. A copyright extends for 
twenty-eight years, and may be renewed by the 
author, his widow, or children, for fourteen years 
longer. 



ON PRODUCTION. 89 



CHAPTER V. 

ON PRODUCTION. 

While it is impossible to make discussions in 
Political Economy amusing, it is also impossible 
intelligently to conduct them without constantly 
coming to conclusions which are most cheering. 
We shall find a gratifying law underlying the oper- 
ations of production, which demonstrates that God 
designed man to be a producer, and to produce un- 
der conditions of constantly increasing advantage. 
The world with its forces, and man with his mo- 
tives, are so admirably constructed, that these condi- 
tions of increasing advantage cannot fail, under 
freedom, to redound to the benefit of the masses of 
men. We will first determine what production is, 
and then the cheering law that underlies it. 

Every man who puts forth an effort to satisfy the 
desire of another, with the expectation of a return, 
is, in the language of Political Economy, a Pro- 
ducer. To produce is to render a service for an 
equivalent. A Product is a service rendered. The 
hod-carrier is as much a producer as the man who 
makes the bricks. Unluckily, Adam Smith, who is 
sometimes called the father of this science, used 
these terms in a restricted sense, and thereby almost 
unfitted them to do their proper work. He confined 
production to the occasioning of changes in material 



90 ELEMENTS OF POLITICAL ECOIS^OMY. 

objects. He gifted with the title of producer the 
farmer, the mechanic, the miner, the hunter, and 
fisherman, because they bring to the market a ma- 
terial commodity ; and refused the honor of the term 
to those who render simple services, however essen- 
tial. This is wrong. It proceeds from an inadequate 
analysis of value. That which is produced, that with 
which we have to do, is not matter but value. He who 
creates value is the producer. But we have seen that 
value is not an attribute of matter, but of services ex- 
changed. The service may be employed upon matter, 
may be embodied in it, but what is really sold is not 
the matter, but the service ; and services are all the 
time being sold, as those of the singer, the teacher, 
the clergyman, which have no connection whatever 
with matter. These services have purchasing-power, 
these persons create value, and therefore, they are 
producers. Certainly, in an inventory of all values, 
a large portion would be found connected with ma- 
terial objects, but by no means the whole. Our lan- 
guage must be broad enough to cover all the cases. 
Therefore, Production is the rendering of any service 
for which something is demanded in return. 

Now, then, as to the beneficent law that underlies 
it. Production is effort. But efforts are irksome. 
Is there, then, no way to lessen efforts, to make them 
less onerous, and, at the same time, more produc- 
tive ? Yes, thank God, there is ! We may bring to 
our aid the gratuitous help of Nature ! The world is 
full of powers which we may employ to facilitate 
our work. For example, at first people ground their 
grain by hand ; and it was a weary, weary task to 
sit cramped at the mill all day, and turn, and turn, 



ON PRODUCTION. 91 

and turn.^ The effort was great, and the result was 
small. At length it occun-ed to somebody that the 
weight of water would turn a wheel, and that the 
wheel might turn the mill-stones. Once thought of, 
the water-wheel was soon an actual fact. Instead 
of human strength, Nature works now, and what is 
better, works for nothing! Man's service is still 
needed, he feeds the hopper, tends the bags, but he 
does not ache so bad I Nor is this all. One day's 
labor is now vastly more productive. More grain is 
ground, bread comes easier to the poor, and the 
wheel which free water tm'ns blesses its millions 
with a cheapened product! 

Let us take another illustration. The old hand- 
loom was the only means antiquity knew of for pro- 
curing clothing. The shuttle was thrown by human 
muscle. Every thread cost a throw. This work 
was mostly done by women. The word wife comes 
from the word to weave. The wife, then, was pri- 
marily the weaver. 'While the slave w^oman sat on 
the ground, and turned the handle of the mill to 
grind the grain, the wife was exalted to the dignity 
of the loom, and worked away at the monotonous 
task, thread by thread, thread by thread. Doubtless 
the hand-loom was a great improvement on the 
earlier processes, and was itself gradually improved 
as the centuries went by, each improvement being 
the substitution either of a gratuitous force of Na- 
ture for an irksome human etibrt, or an easier pro- 
cess of art for a more laborious one. Every step of 
improvement w^as a lessening of obstacles with refer- 
ence to a given satisfaction. All the way up to 

1 Exod. xi. 5 ; Isa. xlvii. 2. 



92 ELEMENTS OF POLITICAL ECONOMY. 

our present admirable machinery — the power-loom, 
which weaves, as if by magic, while a child can 
tend it — every step has marked a lessening of 
efforts relatively to utilities. The utility, the satis- 
faction, the yard of cloth, has cost less and less of 
human effort, not only to the producer, but, through 
exchange, to everybody. Accidental causes in this 
country have interrupted this progress for a little, at 
least in the case of cottons, but it will go on again 
in the good time coming. And this progress, thus 
briefly illustrated in the two cases of flour and 
cloth, has been going on, and is constantly going 
on, in all directions ; more strikingly, perhaps, in 
the production of material commodities, in which 
the powers of Nature may be indefinitely applied by 
machinery, but at the same time there are no ser- 
vices of any kind which are not facilitated in some 
degree by the progress of knowledge and experi- 
ence ; and the benefits of this increasing advantage 
come home, through exchanges, to everybody ; and, 
consequently, the satisfactions of all bear a larger 
and larger proportion to their efforts. 

This, then, is the underlying and benevolent law 
of production, that God has placed freely at men's 
disposal such materials and forces in Nature, that, 
availing themselves skilfully of these, onerous efforts 
bear a less and less proportion to realized utilities. 
Men have a strong motive to substitute, whenever 
they can, force for muscle, machinery for labor. The 
farmer who used to cut every spire of grass with a 
hand-swung scythe, then rake it up with a hand- 
drawn rake, and then pitch it into the loft with a 
handfork, now mows and rakes and pitches with a 



ON PRODUCTION. 93 

machine. And it is a beautiful consequence of this 
law, that all improvements in machinery, all inven- 
tions, all substitution of Nature's forces for human 
labor, soon become the common property of mankind. 
Patent rights speedily expire by their own limitation, 
secret processes are sure to become known, and the 
competition of the different men who, under a system 
of freedom, will be sure to use these gratuitous helps, 
will compel each of them to sell their product at a 
rate graduated only by the actual human service 
rendered ; so that, the liberal gifts of Nature, though 
seemingly monopolized at first by ingenious men, 
are not long intercepted in their descent towards the 
masses of mankind. An invention of srreat merit 
even at first does not benefit the patentee alone ; as 
a patentee, his interest leads him to lower the price 
of his product, to bring it within the reach of a 
wider circle of consumers; and so soon as the patent 
has expired, the benefit has at once a wider reach. 
The steam-engine, for example, has long been com- 
mon property. There are, indeed, certain features 
of the more perfect engines still restricted in their 
manufacture by the rights of individuals, and this 
will always be so while invention continues busy, 
but the perpetual tendency in all inventions is from 
individual property towards a common right. And 
it is here in place to remark, that the application of 
machinery to all departments of production, and the 
introduction of improved processes of every name, 
can hardly in the first instance be prejudicial to any, 
and are sure ultimately to be beneficial to all. 

What is the effect on values of these processes 
now made easier in all directions ? Clearly, since 



94 ELEMENTS OF POLITICAL ECONOMY. 

value is nothing but the relation between two ser- 
vices exchanged, no effect at all is produced on val- 
ues, if the improvements have gone on equally in all 
directions. Everything exchanges just as before. If 
the improvements have not gone on equally, then 
the value, that is, the purchasing power, of those 
products is diminished in whose production the im- 
provements have been relatively greater. As the 
service has now diminished, the value, other things 
being equal, has diminished along v^dth it. For such 
a service less can be demanded in return. The 
utility of the product, on the other hand, that is, 
its capacity to gratify desire, remains as before. A 
less effort produces the same utility. The portion of 
effort thus set free, however, is not probably idle. It 
will be still put forth to create a larger number of 
products of the same kind, each one of which indeed 
has less purchasing power than before, but the aggre- 
gate value of which is much greater than before. 
For example, when machinery is employed in the 
making of gloves, which before were cut and stitched 
by hand, the value of a pair of gloves, estimated in 
anything whose production has not been altered by 
a similar improvement, will infallibly decline ; but 
the aggregate value of all the gloves made in the 
establishment will be greater than before, because 
otherwise there would have been no motive to intro- 
duce the machinery. Does, then, the machine cre- 
ate value, contrary to the doctrine in the chapter on 
value ? Not strictly. The machine creates utilities, 
since each pair of the now increased number of 
gloves has the same utility as a pair of the former 
fewer number : and the maker is able to render a 



ON PRODUCTION. 95 

service to a greater number of persons than before ; 
and it is true, that, for a time, especially if the pro- 
cess be not yet generally applied in glove-making, 
before value has a chance to adjust itself to the new 
state of things, he will realize extra gains ; he will 
obtain, in part, the old price for his product, and it 
would seem, in this case, as if the machine created 
value. Nevertheless, it is only a transitory state of 
things. Just as soon as machines come to be gen- 
erally employed in the business, value adjusts itself, 
through competition, to the real human service ren- 
dered, and the extra gains of the first operators are 
cut off. The gain of the reduction has now become 
permanent to all consumers of gloves. It is this 
interval between the old price and the new which 
gives to producers the margin for their enterprise, 
and a sharp spur to invent and adopt improvements. 
The improvements once become general, the gain 
redounds to the whole community. The value then 
of all services which have been facilitated by im- 
proved processes, is constantly being lessened rela- 
tively to services not equally facilitated ; and here 
we gain the first glimpse of a truth, which will 
afterwards appear in the clearest light, namely, that 
the value of commodities tends to decline as com- 
pared with human labor, and therefore, that there is 
inwrought into the nature of things a tendency 
towards the elevation of the masses of men in a 
scale of comforts. 

A leading proposition of production is the follow- 
ing : — Production may go on indefinitely in all direc- 
tions without ever a fear of reaching a general glut 
of products. This proposition was first fully devel- 



96 ELEMENTS OF POLITICAL ECONOMY. 

oped by Say, in the fifteenth chapter of his well- 
known treatise on " Political Economy," and the proof 
of it, and some of the consequences of it, are well 
worthy of our attention. I shall put the proof of it 
in this form : the desires of men which the efforts of 
other men can satisfy, are unlimited in number and 
indefinite in degree; and therefore, mutual eflforts 
can continue to be put forth in exchange, until 
these unlimited and indefinite desires of all men are 
all met — a goal which never can be reached. This 
proposition demolishes at a stroke the fallacy which 
pervades Dr. Chalmer's book on " Political Economy," 
namely, that the universal market is limited, and 
therefore, were it not for the unproductive consump- 
tion of the rich and luxurious, and the equally un- 
productive consumption of wars, there would soon 
be a general glut, and production must cease for the 
lack of a vent for its products. What constitutes a 
market for anything ? This, that somebody desires 
the service thus offered, and is willing to render a 
return service acceptable to the offerer. Only two 
things can limit the universal market, first, a lack 
of desires, and secondly, a lack of return services. 
But there can be no lack of desires at any time, and 
there will be the greatest plenty of return services 
where production is most busy and most universal. 
Therefore, again, no general glut of products, is pos- 
sible to occur, A truth which we have already seen 
in another connection, reappears here as a conse- 
quence of this proposition, and will reappear again 
and again, namely, that all persons are interested 
commercially, as well as morally, in the prosperity of 
other persons, and each nation which has anything 



ON PRODUCTION. 97 

to exchange, is directly interested in the prosperity 
of all other nations ; because the more production 
everywhere, the better market everywhere. A mar- 
ket for products is made by products in market. 

But while no such thing as a general glut of prod- 
ucts ever did, or ever can occur, a glut in respect to 
certain services is very common. Through want of 
foresight, or miscalculation, particular services arc 
offered in too great abundance, or of a kind not 
adapted to the demand, and in respect to these the 
market is truly said to be glutted. This frequently 
happens with editions of books; more copies are 
printed than can be sold at remunerative prices. 
Also when fashion changes, the goods which were 
fashionable, but are so no longer, are apt to be in 
excess of the demand. The only precaution that 
can be taken to avoid losses of this character, is the 
cultivation of foresight, by studying as accurately 
as possible the nature of human desires, and the 
changes that have been observed to take place in 
them. This constitutes mercantile sagacity; and 
the most successful producers in all departments are 
those who best develop this sagacity, who adapt 
their services to the existing and coming demand, 
who, to excellence in the substance of their services, 
add taste and attractiveness to their form, who tend 
rather to lead the fashions for the many than fol- 
low in their wake. The field of production is like 
the billowy and heaving sea : to navigate most suc- 
cessfully requires foresight, a wise courage, a power 
of adaptation to varying circumstances, skill to veer 
and tack when the wind changes, and a will to scud 
before a favoring breeze with all saUs set. Produc- 

7 



98 ELEMENTS OF POLITICAL ECONOMY. 

tion, as a general rale, is no dead level of monoto- 
nous exertion ; since its sphere is life with its wants, 
man with his desires ; and there is scope for the 
development of ingenious mind in almost all of its 
departments. Since all exchange is due to the 
diversity of relative advantage, whoever develops 
his powers of observation, of application, of adap- 
tation, to a higher point, and avails himself more 
skilfully of all peculiar facilities, will reap a larger 
share of the harvest of exchange. 

The immense increase of production, and the su- 
perior perfection of products consequent upon what 
he calls the Division of Labor, was first pointed out 
by Adam Smith. The chapter in which this author 
treats of the division of labor, has always been the 
most famous, and is still one of the most interesting 
in the " Wealth of Nations." We have already seen 
how exchange is stimulated and made profitable by 
the diversity of employments, and by the applica- 
tion of all peculiar gifts to the corresponding obsta- 
cles which lie in the path of production : this is the 
more general truth of which Adam Smith's prin- 
ciple of the division of labor is a specific part. He 
means by this term the dividing up of a process or 
employment into particular parts, so that each per- 
son employed can devote himself wholly to one 
section of the process. The proposition is, that by 
means of the division of labor, the processes of pro- 
duction are vastly facilitated. He cites, as an illus- 
tration, the manufacture of pins. One man draws 
out the wire, another straightens it, a third cuts it, 
a fourth sharpens the points, a fifth grinds it at the 
top for receiving the head. The making the heads 



ON PRODUCTION. 99 

consists of two or three distinct operations, each 
confided to a single person. The remaining proc- 
esses are similarly divided up, and the result is, 
according to Dr. Smith, that in a single establish- 
ment, employing only ten persons, 48,000 pins are 
made in a day, while if each man went through all 
the processes himself, he could hardly make twenty 
pins a day, or two hundi'ed for the whole establish- 
ment. Perhaps a more striking illustration of the 
division of labor may be found in the art of watch- 
making. According to evidence brought before a 
committee of the British House of Commons, there 
are one hundred and two distinct branches of this 
art, to each of which a boy may be put apprentice ; 
and when his apprenticeship is expired, he is unable, 
without subsequent instruction, to work at any other 
branch. The watch-finisher is the only person, out 
of the one hundred and two, who is able to work in 
any other department than his own. The causes 
of increased efficiency imparted to production by 
the division of labor are reduced by Dr. Smith to 
three : — 

1. The improved dexterity, corporeal and intel- 
lectual, acquired by the repetition of one simple 
operation. 

2. The saving of the time which is commonly 
lost in passing from one species of work to another, 
and in the change of place, position, and tools. 

3. The invention of a great number of machines 
which facilitate and abridge labor in all its depart- 
ments. Because the simple task which complete 
division of labor gives to each operator is precisely 
what machinery may most easily be made to per- 



100 ELE3MENTS OF POLITICAL ECONOMY. 

form, and what the operator, if intelligent, will be 
most likely to devise machinery for. Add to these 
advantages of the division of labor these other : — 

4. The saving of the waste of material, which is 
unavoidable when a person learns an art, but which 
is much less when he learns one process, than all the 
processes. 

5. The more economical distribution of labor by 
classing the operatives according to their strength, 
skill, and experience. The easier parts may be per- 
formed by women and by children, whose labor is 
less expensive ; the ruder parts by ruder hands ; and 
only the more difiicult processes by the most skilful 
workmen, who must be highly paid. Next to the 
first, this advantage is the most important. 

6. There is a saving in tools. The various imple- 
ments, being now in constant use, yield a better 
return for their original cost ; and therefore their 
owners can afford to have them of a better quality, 
and this, too, facilitates production. 

7. It brings the producers and consumers into 
more intimate and safe relations. The division of 
labor between the wholesale and the retail trade is 
of great advantage. The retailers know their local 
markets, and supply them without loss or waste from 
the wholesale reservoirs. The wholesale reservoirs 
neatly control the various streams of production, 
according as demand is slackened or intensified. 
Thus, for example, a large city is daily supplied 
with fresh meat, without the loss, perhaps, of a hun- 
dred weight. 

There are some disadvantages resulting from this 
division of labor : — 



ON PRODUCTION. 101 

1. The work becomes in some departments mon- 
otonous and irksome, while some variety of occu- 
pation would afford relief by employing different 
muscles, or different faculties of the mind. 

2. There is some tendency to dwarf the mental 
and corporeal powers, through exclusive attention to 
one part only of a complicated process. 

3. When this part has been learned, and long 
made the means of a livelihood, a person has less 
power to adapt himself to change of circumstances, 
and becomes too much dependent on the continu- 
ance of the business in that form. 

The degree to which the division of labor can be 
carried, depends in part upon the extent of the mar- 
ket, and in part upon the nature of the employment. 
To recur to Dr. Smith's illustration of the pins: if 
the market would only have received 24,000 pins 
a day from that establishment, instead of 48,000, 
the division of labor could not have been carried to 
the same extent, because if it had been, the men 
would be idle one half the time. In that case, some 
of the men would be dismissed, and some of the 
separate processes be combined, and production 
would be less efficient from the limitation of the 
market. Production, therefore, is most profitable 
when the market is broad enough to allow a full 
division of labor, and complete employment to all 
the operatives ; and, the market being presupposed, 
is more likely to be profitable in large establishments 
than in small ; because, (1) the division of labor can 
be carried to a fuller extent ; (2) more perfect ma- 
chinery can be afforded; (3) relatively less superinten- 
dence is required ; and (4) the scraps and ends of a 



102 ELEMENTS OF POLITICAL ECONOMY. 

large business are frequently of sufficient importance 
to justify one or more subordinate branches of busi- 
ness in connection with the main business. For 
example, a large saw-mill may profitably furnish 
lath as well as lumber, since the refuse boards and 
slabs may go to lath. A wholesale butchering estab- 
lishment of neat cattle might profitably have, in con- 
nection with the sale of meat, a tannery to dispose 
of the hides, a comb manufactory to dispose of the 
horns, a glue manufactory to dispose of the feet, a 
stall for the hair, which is useful in plastering, while 
the offal might be chemically disposed of in fer- 
tilizers. 

The nature of the employment also limits the 
degree to which the division of labor may be car- 
ried. Agriculture, for instance, allows less of this 
division than most other departments of production, 
because its various operations cannot, from the 
nature of the case, become simultaneous. When 
the sowing is once done, the producer must wait 
some months upon Nature, till his agency is again 
required in the reaping. This fact, that agriculture 
can be less facilitated by the division of labor, and by 
the use of machinery, than most other departments 
of material production, constitutes one ground of an 
important truth, which we shall hereafter perceive 
stands also on another and firmer ground, the truth, 
namely, that agricultural products tend constantly to 
rise in value as compared, with other commodities. 



ON LABOR. 103 



CHAPTER VI. 

ON LABOR. 

It is a curious thing, and one that drawls after it 
very important consequences, that physical labor 
consists simply in moving things. When a man 
works with his hands, all that he does, or can do, 
is to produce a series of motions. Human muscles 
are only capable of two things, namely, producing 
motion, and resisting motion. All the marvellous 
results of human labor in all the world, have flowed 
from so simple a matter as the contraction and ex- 
pansion of muscle. Work is motion, and weariness 
is weariness of muscle. The world of materials is 
so cunningly constructed, that, when they are moved 
into right position the powers of Nature do the rest, 
and objects of utility are the result. 

When the pioneer fells a tree, he moves his axe 
through the trunk, and then the power of gravitation 
seizes the tree, and brings it to the ground. He pro- 
duces a series of motions upon the tree, but the final 
motion, by which the century-girdled oak comes 
crashing to the earth, is not of his producing. Na- 
ture does that. Wool, cotton, and flax, have by 
nature a certain tenacity of fibre. Man moves these 
fibres in certain relations to each other by an instru- 
ment called a spindle, and the result is thread. Then 
the threads are moved in certain relations with each 



104 ELEMENTS OF POLITICAL ECONOMY. 

other by an instrument called a shuttle, and the re- 
sult is a web of cloth. The tailor moves his shears 
through the cloth, and then his needles, and the result 
is a coat, — the object of utility for which all these 
processes were gone through with. The farmer first 
moves the ground, then moves his seeds into it, 
moves his sickle through the standing corn, moves 
his corn to the granary and mill, moves his meal 
from the mill to the larder, at which last point he 
surrenders the product to the" official who acts as his 
secretary of the interior. She moves the meal to the 
kneading-trough, and, having well moved it there, 
moves it to the oven, and, from the oven, after due 
interval, moves it to the table, at which point pro- 
duction ceases, and consumption begins. 

Physical labor, then, is, and can be, nothing but 
this, an effort, by which tnaterials or implements are 
moved luith reference to a given result. Nature fur- 
nishes all the materials, and all the primary qualities 
of which we avail ourselves in production. She 
cooperates at every step. We pay her absolutely 
nothing for all she does. All we can shirk off our 
own shoulders, and throw upon hers, is so much clear 
gain. And it is a most happy circumstance that 
this is being done more and more completely in the 
production of nearly all commodities. Nature is 
good, to use a commercial term, for all she can be 
made to carry. 

Now, since motion is the only thing which man is 
required to furnish in the production of commodities, 
he naturally looks around for helps in this matter. 
The first thing he lighted on, as a help to produce 
motion, was the domestic animals. The ox, the ass, 



ON LABOR. 106 

the horse, were doubtless domesticated in the very 
beginnings of society. Men want these animals to 
produce motion for them — simply that. And as 
they can be ysed in so many different places, and 
for such a variety of purposes, and are so cheaply 
reared, they are exceedingly convenient as a motive 
power, and will probably never be superseded. The 
discovery and application of the great motive powers 
of water and steam have scarcely occasioned a 
lessened demand for the earlier and humbler motors, 
oxen and horses. Some of my readers will probably 
remember the time, when the introduction of rail- 
roads was opposed by some people, on the ground 
that the value of horses, and the business of team- 
sters would thereby be destroyed. Experience has 
demonstrated in this case, as it does in all similar 
cases, that improved machinery, and improved facil- 
ities of all kinds, so far from harming any class of 
persons permanently, are likely to be a gain to all 
classes of persons. At least, they only are harmed, 
who stupidly hold on to the old methods. 

Labor, having employed from a very early time 
as a motive power the domestic animals, secured 
after a while, as inanimate auxiliarie-s, the water- 
wheel and the windmill; and, much later, the steam- 
engine. It is a point that has scarcely been noticed, 
even if it has ever been noticed at all, that all these 
auxiliaries, whether animate or inanimate, produce 
simple motions of the same kind as, and only sup- 
plemental to, the motion produced by a human arm. 
The most ponderous engine merely reduplicates that 
which the arm of a child is capable of; while in 
point of delicacy and firmness of touch, perhaps no 



106 ELEMENTS OF POLITICAL ECONOMY. 

machinery has yet been devised which can subdivide 
and apply this motion as skilfully as the human 
fingers can. It is said, that some of the lace made 
wholly by hand, is finer and more delicate than any 
yet woven by machinery, although the introduction 
of machinery into lace-making has cheapened the 
product, according to Dr. Ure, to about J^ of its for- 
mer cost. What we call power, then, however pro- 
duced, is simple motion. But in order to subdivide 
these motions and apply them to the various purposes 
of production, implements of all sorts are needed, 
and implements, as we shall see in the next chapter, 
are always the gift of capital. But no power how- 
ever mighty or however delicate, and no implements 
however perfect, can ever dispense with some por- 
tion of human labor. Not until machinery can be 
taught to think, to adapt means to ends, will human 
labor cease to play a chief part in production. These 
therefore, are, and always will be, the three requisites 
of material production : Labor, Power- Agents, Cap- 
ital. 

Besides physical labor, there are the various forms 
of mental efforts put forth by men to satisfy the 
desires of other men, and with reference to a return. 
So far as exertion, physical or mental, is put forth 
for amusement, or for a pure benevolent motive, it 
has nothing to do with Political Economy. It is only 
exertion which demands for itself something in ex- 
change, that is technically labor. Labor, which is 
primarily mental, such as most professional labor, 
the labor of the editor, the teacher, the architect, 
has of course little connection with motion or with 
commodities. But it is not on that account less 



ON LABOR. 107 

useful or less valuable. The exchange of simple 
services depends on the same principles, gives rise to 
the same phenomena, and is amenable to the same 
science as all other exchanges. One man, as the 
violin-maker, offers services in which a commodity 
intervenes ; another, as the violinist, offers services 
in which no commodity intervenes ; each has gained 
in his own art a point of relative advantage as com- 
pared with other men, and these doubtless have 
gained some point of relative advantage as compared 
with them ; each, by the sale of his respective ser- 
vice, meets some desire of the buyer, and is paid on 
the same principle as the other. The violin-maker 
of Cremona, who sold his instruments for five hun- 
dred francs apiece, was no more and no less a laborer, 
in the language of our science, than Paganini, who 
sold an hour's playing in the theatres for five thou- 
sand francs. 

Having now seen what labor is, let us pass to the 
principles that determine its remuneration. I can 
see no reason why the purchasing-power of labor is 
not determined in the same way as the purchasing- 
power of all other things ; and, if so, there is no 
difficulty in pointing out the general law of wages. 
I go back constantly to first principles, because I 
believe that first principles really control everything. 
Chance effects there most certainly are ; but, as they 
happen now on one side and now on the other, they 
balance each other, and leave all the great working 
forces unaffected. For the sake of convenience, a 
distinction may be made at this point between pro- 
fessional and common labor, — a distinction which 
is not indeed very definite, but which is sufficiently 



108 ELEMENTS OF POLITICAL ECONOMY. 

SO for the purpose in hand. The wages of profes- 
sional labor of all sorts run up and down upon a 
scale whose extremes are much wider apart than the 
extremes of the scale which marks the variations in 
the wages of common labor, while at the same time 
the principle that determines the value of both forms 
of labor alike is the principle that determines all 
other value, namely, the law of Supply and Demand. 
The wages of professional labor, however, are so far 
different from the wages of common labor as to 
demand a somewhat distinct treatment. Why could 
Daniel Webster demand a fee of a thousand dollars 
for attending to a single case in court, Paganini a 
like sum for an hour's playing on a violin, and Jenny 
Lind at least as much for an evening's singing in a 
concert ? Because there was in each case a strong 
demand for a peculiar service, and only one person 
in the whole world who could render that service, at 
least in the same perfection. The demand was 
large, the supply was small, and the value conse- 
quently great. The highest efforts of professional 
skill will always receivS .a high reward, whenever 
there is one person even, who, together with a strong 
desire for the product, has also the power to give a 
service in return ; and especially whenever there are 
many persons who have a similar desire and power, 
to whom, as in the case of Paganini and Jenny Lind, 
the service can be rendered in common without 
lessening the satisfaction of each individual. That 
the supply is small in these higher regions of skilled 
effort, is due partly to the fact, that Nature is not 
lavish in her gifts of peculiar talents, and partly to 
the fact, that those who have received have assidu- 



ON LABOR. 109 

ously cultivated them, and have reached in conse- 
quence a high point of relative advantage. These 
persons have what may be called a natural monop- 
oly in their respective fields of high effort, because 
there are few others w4io have the natural gifts and 
the acquired skill which enable them to come in 
competition with them. But the objections which 
lie with such force against artificial monopolies, can- 
not be urged at all against a natural monopoly ; for, 
if the road to excellence be open to all, and no arti- 
ficial obstructions thrown in the paths of any, there 
is no blame but rather praise for him who distances 
all competitors, and demands for services of peculiar 
excellence a large remuneration. John Sartain is a 
superior engraver : he enjoys a natural monopoly in 
the highest walks of that art ; the wages of his labor 
are very high; yet nobody can complain of this, 
since he has had no factitious privileges, but has 
fairly attained his excellence under freedom. Ex- 
change rejoices in all diversity of advantage that is 
the birth of freedom, but reprobates with all her force 
advantage that is gained by artificial restrictions, 
because artificial restrictions always infringe on 
somebody's right to render services for a return ; and 
the right to render services for a return is the funda- 
mental conception in the right of Property. The 
wages of professional labor, then, are determined by 
the relations between the demand for such labor and 
the supply at hand ; and are usually higher than the 
wages of common labor, because tlie supply of such 
laborers is restricted by the lack either (1) of appro- 
priate original gifts, or (2) of the requisite industry, 
or (3) of the means of suitable education and train- 
ing. 



110 ELEMENTS OF POLITICAL ECONOMY. 

Within the great law of supply and demand, there 
are several important subordinate principles, which 
go to vary the wages of both professional and com- 
mon labor, principally through their action upon 
supply ; and it is now in order to consider these, 
before we pass to consider the wages of common 
labor. In common with all the writers who have 
succeeded him, I shall avail myself freely at this 
point of the labors of Adam Smith. That writer 
considers that there are certain circumstances in the 
employments themselves, which either really, or at 
least in men's imaginations, make up for a small 
pecuniary gain in some, and counterbalance a great 
one in others. 

1. The agreeableness or disagreeableness of the 
employments will have an influence in determin- 
ing the rate of wages paid to those who engage in 
them. The more agreeable employment will attract 
the larger number, and will experience in conse- 
quence the press of competition, and the rate of 
wages will be lessened by the increased supply of 
laborers. The more disagreeable employment will 
feel less the pressure of numbers, and will secure, 
other things being equal, a higher rate of remunera- 
tion in consequence. Among the elements which, 
in spite of the diversity of natural tastes, make any 
employment agreeable or disagreeable to the labor- 
ers, are (1) the less or greater exertion of physical 
strength required, (2) the healthfulness or unhealth- 
fulness of the labor, (3) its cleanliness or dirtiness, 
(4) the degree of liberty or confinement in it, (5) the 
safety or hazard of the employment, (6) the esteem 
or disrepute of it in public opinion. To illustrate 



ox LABOR. Ill 

each of these in order, the stone-mason, the glass- 
blower, the scavenger, the factory operative, the 
worker in a powder-mill, the smuggler, will each 
receive a larger compensation owing to the peculiar 
element of disagreeableness involved in his employ- 
ment ; and he will be able to demand and secure it 
through the action of the disagreeableness upon the 
supply of such laborers. Of all these elements, 
public opinion is perhaps tlie most operative ; and 
if this be favorable to an employment, and some 
social consideration be attached to it, and only com- 
mon qualifications be required for it, the wages in it 
will infallibly be low. This is probably the main 
reason why so many young women prefer to teach, 
rather than be employed in mills, shops, or offices, and 
why the wages of female teachers are so pitifully low; 
although each of the elements of agreeableness spec- 
ified above may also contribute something towards 
the same result. If a business be decidedly opposed 
to public opinion, it must hold out the inducement 
of a large reward, or nobody will engage in it. This 
explains the abnormal gains of the slave-trade, the 
liquor-business, of gambling-houses, and of lotteries. 
2. The easiness and cheapness, or the difficulty 
and expense, of learning different employments, 
will have an influence on the rate of wages paid 
in them. The more quickly and cheaply one can 
learn to perform the duties of a place satisfactorily, 
the less, so far forth, will be his wages ; because 
there will be many who will compete with him in 
rendering such services ; the more time, difficulty, 
and expense involved in learning a business, the 
larger, so far forth, will be the wages secured by it; 



112 ELEMENTS OE POLITICAL ECONOMY. 

because fewer persons have the means, the foresight, 
the patience, to prepare themselves for such an avo- 
cation. This is the principal ground of the differ- 
ence in the wages of skilled and unskilled labor. 
The artisan has, at least, given time, and the pro- 
fessional man has given both time and money, to fit 
themselves to render the services which they now 
offer to society ; and it is right, therefore, for them 
to demand a higher rate of compensation than is 
accorded to operatives and common laborers. But 
a right to demand does not always carry along with 
it an ability to secure : in this case it does, through 
the reduction of numbers which these olsstacles at 
the entrance occasion, and the consequent weakness 
of competition. To put a boy apprentice to a trade, 
requires on the part of the parents a foresight, an 
ability to get on without his immediate help, and 
sometimes an amount of money for his board and 
clothes, which all parents do not possess ; and con- 
sequently, the number of skilled artisans, who must 
learn when they are young if at all, are relatively 
few compared with common laborers, and are able 
to realize a much higher rate of wages than they. 
In the professions, if we confine our attention to 
those persons who are thoroughly trained for them, 
we shall find a higher rate of compensation still, 
and one made higher on the same principles ; 
although we must here bear in mind the coun- 
ter-working influences which tend to increase the 
competition in the professions, namely, the respecta- 
bility which attends them, the desire of knowledge 
for its own sake which is gained in connection with 
them, the instruction wholly or in part gratuitously 



ON LABOE. 113 

offered to those in course of preparation for them, and 
the desire to do good, without regard to pecuniary 
reward, which actuates many who enter upon them. 

8. The constancy or inconstancy of employment 
is a consideration that affects wages. If the em- 
ployment be such that it can only be carried on 
during nine months of the year, the wages of the 
day or month will be greater than they would be if 
it could be carried on during the twelve months. 
The laborer looks to the aggregate earnings of the 
year, and will hardly take up a trade which affords 
employment but a part of the time, unless some 
compensation can be found in the higher wages for 
that time. This is the chief reason why the day's 
wages of the mason and the house-painter, in this 
climate at least, are higher than those of the car- 
penter or smith. The coachman, also, may stand 
by his horses half the day or night, with no call 
for his services, and must have, therefore, a propor- 
tionably higher fare from those whom he does 
transport. In general, it is found that men prefer 
a constant employment with a lower rate of wages, 
than an inconstant one, with a prospect of higher 
pay for the particular jobs actually done, and be- 
cause they prefer that, those who take up with the 
other are able to secure a higher rate of pay in their 
less eligible avocation. Counter working this, how- 
ever, are the desires which many men have, for 
intervals of leisure in their business; and the op- 
portunity to make these intervals subservient to 
another branch of business or means of livelihood. 

4. The amount of trust involved affects wages. 
Men in responsible positions secure a higher rate of 
s 



114 ELEIMENTS OF POLITICAL ECONOMY. 

pay for their services than can be acco anted for, ex- 
cept by a reference to the unwillingness of people 
to intrust great interests to others, unless they are 
men of established character for probity. Such 
men, men who combine all the other requisites 
for an important post, with a well-known honesty, 
are comparatively rare ; and, when they are found, 
will receive a very high compensation for their ser- 
vices. Treasurers of corporations, cashiers of banks, 
and holders of trust-funds generally, are examples in 
point. Shall we say, then, that men offer their hon- 
esty in the market, as they offer their skill, and are 
paid for the one as for the other ? No ! Their skill 
has been acquired to sell, and for no other reason ; 
but their honesty, if it be genuine, has another basis 
altogether; and he who is honest, simply because 
honesty is the best policy, is not honest at all ! The 
very characteristic of honesty is that it cannot be 
bought! It has a moral, and not a mercantile foun- 
dation. In point of fact, a man who has the full 
confidence of his fellow-citizens, as an honest man, 
and at the same time all the other qualifications 
requisite for a post of high pecuniary trust, is in 
position, partly on the ground of his honesty, to 
render a high service, and will receive for that ser- 
vice a high reward ; but I protest, in the name of 
morals, against the notion that honesty is a market- 
able article : it is rather an underlying element of 
moral character, which fits men indeed to render 
certain services, but the honesty is maintained, not 
for the sake of the service, but has an independent 
basis of its own. So, also, most people would pre- 
fer a deeply religious man for a preacher and spir- 



ON LABOR. 115 

itual guide, but it is a perversion of language to 
maintain that in rendering these services a clergy- 
man sells his religion. It is true that he sells ser- 
vices to the appropriate rendering of which his 
personal piety contributes one element; but the 
piety is not nourished for the sake of the services, 
but for its own sake, and it must not be confounded 
with that which is sold. Accordingly, while the 
clergyman's vocation is sacred, and belongs to the 
sphere of religion, his salary belongs to the sphere 
of exchange, and its determination is wholly a busi- 
ness transaction. This distinction ought to be bet- 
ter understood than it is ; and both clergymen and 
people need to be reminded that the spiritual things 
belong to one sphere, and the carnal things to an- 
other. The amount of a clergyman's salary, and the 
time and mode of its payment, are matters of pure 
business; and the clergyman himself is to blame if 
he does not attend to them, and insist on them, on 
business principles. 

5. The probability of success in any employment 
is a circumstance that has some influence on the 
rate of wages paid in it, through the action of this 
probability on the numbers of those who enter upon 
it. If success is problematical, fewer will engage in 
such a business, and those who do engage in it and 
succeed, will reap a very high reward. Ten boys, 
for example, put to the blacksmith's trade, ordinary 
capacity being presupposed, will probably every one 
succeed in becoming a tolerable workman ; but of 
ten boys of the same capacity put apprentice to an 
engraver, probably not over three would ever reach 
any high degree of skill and success ; and therefore, 



116 ELEMENTS OF POLITICAL ECONOMY. 

the pressure of numbers will be felt much more in 
the former than the latter art. So also, those who 
take jobs by contract, and who consequently assume 
some risks, are usually paid at a higher rate than 
those who do work by the day. It is true that this 
is owing partly to the fact that the contractor com- 
monly uses his own capital, and must therefore be 
paid profits as well' as wages, and also that the 
wages of superintendence are due to him as well 
as ordinary wages ; still there is a residuum of 
difference which can only be accounted for by the 
risk he runs of a successful issue. The differ- 
ence in wages from this fifth cause of variation, 
would be greater than it is, were it not for the over- 
weening confidence which most men have in their 
own good luck. This confidence is seen in the rush 
which is always made for newly discovered mining 
regions, and in the facility with which even yet lot- 
tery tickets are sold. It is demonstrable beforehand, 
on the doctrine of chances, that no lottery ticket is 
worth so much as it is sold for, and yet men buy on 
in spite of the demonstration ; and experience in 
California and at Pike's Peak, has sadly taught how 
excessive was the confidence in their own success of 
the men who flocked to those new El Dorados. 

6. Custom and prejudice and fashion, have some- 
thing to do with the determination of wages in some 
departments. Custom, especially in former times, 
has been very operative. The current fees of law- 
yers and physicians have been largely dependent on 
custom, competition merely coming in to decide 
how many such fees a man should get, rather than 
lessening the amount of each particular fee. Cus- 



ON LABOK. 117 

torn determines the wages when men take farms on 
shares. Bat competition is now breaking down 
custom in all directions, and will soon, I think, 
reign supreme over the economic field. Prejudice 
is closely allied to custom, and has some voice still 
in adjusting wages, as may be seen, perhaps, in wo- 
men's wages, crowded down to a point unreasonably 
low, as compared with the wages of men. Custom 
and prejudice may yield the field, but fashion, which 
is one form of competition, will always have an 
influence over wages. They who lead the styles in 
any department whatsoever, will always offer their 
services to society at an advantage to themselves, 
and their rate of compensation will be legitimately 
higher than the average rate. 

7. Legal restrictions and voluntary associations 
are another cause acting on wages, by acting on the 
supply of laborers. Laws inhibiting or promoting 
immigration, laws appointing the fees and salaries 
of officials, tariff laws, whether prohibitory . or only 
restrictive, unequal taxation, and so on, all have an 
agency in adjusting wages. Governments are com- 
ing, however, much more freely than formerly, to 
leave everything except the wages of their own ser- 
vants, and those things which they choose to tax, to 
the simple and safe action of supply and demand. 
The guilds of the Middle Ages, and the trades' 
unions of our own day, are examples of voluntary 
associations for the sake of regulating the wages of 
the members by combined action. The restrictions 
in the old guilds, limiting the number of appren- 
tices to each artisan, determining the time a man 
should serve before he could become a master, and 



118 ELEMENTS OF POLITICAL ECONOMY. 

SO on, were very onerous, and have mostly passed 
away. The trades' unions in this country have 
never been very popular or successful. The Prin- 
ters' Union in the principal cities has just been dis- 
solved anaid universal contempt. The spirit of Po- 
litical Economy, which is the spirit of freedom, is 
against such associations for such purposes. If any 
man has a service to render, let him offer it freely, and 
make the best terms he can with whoever wants it. 

Having looked at the principles that determine 
the compensation of skilled labor, and also at some 
causes tending to vary the wages both of skilled 
and common labor, we pass now to a consideration 
of those principles more particularly applicable to 
the wages of common labor. All value, as we 
know, is a resultant of two desires and two efforts, 
and is variable by any variation of either desire or 
either effort. When the laborer offers a series of 
efforts to another person, he does so in virtue of a 
desire for something which that other person has to 
give, for food, clothing, money ; and the other person 
has a desire for the efforts of the laborer, and is 
willing to give in return the food, clothing, money, 
or whatever it may be. The more laborers there are 
who offer their service to this person, the more likely 
he is to obtain the service at a cheap rate, since 
there is a competition among the laborers to secure 
that food, clothing, money, and so on, which he 
offers in return for the service : the more persons, on 
the other hand, who offer food, clothing, money, and 
so on, to the laborers there present, the more likely 
are the latter to receive a high rate for their efforts, 
since there is a competition among employers to 



ON LABOR. 119 

secure such efforts. The number of employers and 
the amount of that which they offer as return for 
such efforts, constitutes the demand for laborers ; 
the number of laborers willing to render service for 
what is thus offered in return, constitutes the supply 
of labor : the cuiTcnt rate of wages of common 
labor is determined by the adjustment, that is, the 
equalization of the demand and supply. In what 
we have said thus far in relation to wages, we have 
referred chiefly to causes acting on the supply of 
laborers, rather than on the demand for labor: we 
must now look in the other direction, and anticipate 
the discussions of the next chapter, so far as to say, 
that all capital constitutes an immediate and pressing 
demand for labor. Whoever desnes a service which 
a laborer can render, and lays by something to pay 
for that service, creates that instant a demand for 
labor; and especially, whoever accumulates raw ma- 
terials which laborers are to work up, builds, buys, 
or keeps machinery which laborers are to tend, or 
puts himself in position to suffer loss by the owner- 
ship of lands, ships, or other property whatsoever, 
unless laborers be employed to make them produc- 
tive, creates thereby an instant demand for labor. 
All such accumulations whatsoever, destined in the 
owner's mind to be employed in further production, 
all implements, buildings, and improvements, de- 
signed to assist labor, and raw materials which labor 
must work up, are capital; and capital must be con- 
stantly united with labor, or the owners will suffer 
an inevitable loss. The presence of capital any- 
where constitutes a demand for labor. The more 
capital there is anywhere, the stronger the demand 



120 ELEMENTS OF POLITICAL ECONOMY. 

for labor; and capital, therefore, is the poor man's 
best friend. Mr. Carey regards the laborer as at a 
disadvantage compared with capital, because the 
laborer must at once dispose of his product, or 
starve ; which seems to me a superficial view of the 
relation, because capital submits to an instant loss 
when it declines to employ labor. Capital does not 
like to lose its profit any more than the laborer likes 
to lose his bread. In a true and general view, the one 
is under just as much pressure to employ laborers, as 
the other to get employment. They come together 
of necessity into a relation of mutual dependence, 
which God has ordained, and which, though man 
may temporarily disturb it, he can never overthrow. 

Labor, then, takes itself to the market to effect an 
exchange with capital. It is only capital that em- 
ploys labor. Now, the terms of the exchange, that is 
to say, the average rate of the wages of common la- 
bor, will depend on the number of laborers compared 
with the amount of capital there present. The ag- 
gregate of all the forms of capital there present, helps 
to make up in the mind of the capitalist his motive for 
employing labor, because the more he has invested 
in buildings, machinery, and materials, the more 
urgent is the necessity to employ laborers, in order 
to make the investment productive ; although only a 
part of the capital is free to be offered in payment 
of wages. Demand for labor is constituted, strictly 
speaking, by that part of the capital which is avail- 
able to be offered in the form of wages, but it is 
clear, that, as a rule, demand, that is, the portion of 
capital set aside for the payment of wages, may 
increase under the influence of increased desire for 



ON LABOR. 121 

laborers, and an increased desire for laborers is a 
necessary consequence of the increase in the aggre- 
gate of capital. Whether the portion set aside for 
wages ivill increase or not, on an increase of capital, 
will depend on the number of laborers. It is cer- 
tainly possible that capital may go on increasing, 
while the wages-fund (the portion set aside for wa- 
ges) may remain stationary, or even diminish, owing 
to the competition of an increased number of labor- 
ers, and the diminished compensation going to each. 
The number of laborers remaining the same, and 
intelligently comprehending their position, the size 
of the wages-fund will necessarily keep pace with 
all increase of aggregate capital. This point of 
connection between the two, this influence of the 
whole capital on the desire for laborers, and con- 
sequently on the wages-fund, is a point which I do 
not remember to have seen noticed by anybody, yet 
which is obviously of much importance in unfolding 
the relations of labor to capital. Now, wherever 
there is capital there is a wages-fund, and we have 
just seen what the connection is between the whole 
capital and that portion of it which is ready to be 
devoted to the payment of wages. If we call this 
portion of capital, or wages-fund, a dividend, and 
the number of laborers a divisor, the quotient will 
be the general average rate of wages at that time 
and place. This principle invariably determines the 
current rate of wages in any country. If the labor- 
ers are few relatively to the amount of capital, there 
will be a large dividend, and a small divisor, and 
infallibly a large quotient. In the reverse case, when 
laborers are many as compared with the capital 



122 ELEMENTS OF POLITICAL ECONOMY. 

that seeks to employ them, the large divisor and 
small dividend will surely give a small quotient. In 
the first case, capitalists will compete for laborers, 
and wages will go up. In the second case, laborers 
will compete for employment, and wages wnll go 
down. 

We see now what we are to think of many reme- 
dies popularly recommended for low wages. When 
wages are very low in any country, or in any depart- 
ment of labor, there are some who think that the 
government ought to interfere to better them, at 
least to designate a minimum below which wages 
shall not go ; others propose that strong public opin- 
ion be brought to bear upon employers, to induce 
them to give sufficient wages : others still maintain 
that combinations among the workmen themselves, 
for the purpose of dictating the rate of wages to the 
employers, would be an appropriate and effective 
remedy. Every one of these is a delusion, and so 
is every other proposal that ignores the law of wages 
just established. That which pays for labor in 
every country, is a certain portion of actually accu- 
mulated capital, which cannot be increased by the 
proposed action of government, nor by the influence 
of public opinion, nor by combinations among the 
workmen themselves. There is also in every coun- 
try a certain number of laborers, and this number 
cannot be diminished by the proposed action of gov- 
ernment, nor by public opinion, nor by combina- 
tions among themselves. There is to be a division 
now among all these laborers of the portion of capital 
actually there present. Suppose there has been free 
competition on both sides, and that the average rate of 



ON LABOR. 123 

wages as thus determined, is one dollar per day for 
each laborer. Supjjose that everybody tliinks that 
this is insufficient, and that government accordingly 
issues a decree that wages thereafter must be one 
dollar and a half per day to each laborer. This de- 
cree has no tendency to increase the size of the 
wages-fund ; that is determined by the general pro- 
ductiveness of labor, and by the division, under free 
competition, between wages and profits; if the de- 
cree, therefore, were carried out, as it never could be, 
the result would be that only two thirds of the 
laborers there present could be employed at all, 
and the remaining third must be supported by char- 
ity, or starve. The wages-fund is only sufficient to 
give to all the laborers a dollar a day, and if the 
government enforces a new distribution at a rate 
one third higher, then one third of the laborers can- 
not be employed at all. There is no use in arguing 
against any one of the four fundamental rules of 
arithmetic. The question of wages is a question of 
Division. It is complained that the quotient is too 
small. Well, then, how many ways are there to 
make a quotient larger? Two ways. Enlarge your 
dividend, the divisor remaining the same, and the 
quotient will be larger : lessen your divisor, the divi- 
dend remaining the same, and the quotient will be 
larger. All accessions to capital, all investment of 
profits in an enlarged business, all saving from ex- 
penditure for the sake of further production, will 
increase the dividend, and, the number of laborers 
continuing as before, the rate of wages will rise. 
Or, if there be no accessions to capital the wages- 
fund consequently standing as before, and the nura- 



124 ELEMENTS OF POLITICAL ECONOMY. 

ber of laborers be diminished, as by emigration to 
new fields of effort, or by enlistment in armies, the 
divisor will be lessened, and the rate of wages will 
rise. The reversed suppositions will give, of com'se, 
reversed results, and wages will go down. 

Though not in the way proposed, there is a way 
in which government may act most beneficially 
upon this matter of wages. By faithfulness to its 
peculiar trust, that is to say, by making the rights 
of person and property as secure as possible, it gives 
an impulse to enterprise, a spur to industry, makes 
the desire of accumulation effective, and thus indi- 
rectly but most powerfully contributes to the in- 
crease of capital, to the fund out of which wages 
are paid. Also, by fostering the means of educa- 
tion, and by the diffusion of knowledge among all 
classes, government acts beneficially upon the labor- 
ers, to make them intelligent, to impart to them that 
character and self-respect which fits them, in ex- 
changing services with capital, to demand and secure 
their full rights in the exchange. It is not denied 
that capital takes advantage of the ignorance and 
immobility of laborers, and sometimes secures their 
services at a less rate than the just relations of 
capital to labor then and there would indicate, but 
the remedy for this is not in arbitrary interference 
of government in the bargain, but in the intelligence 
and self-respect of the laborers which shall fit them 
to insist on a just bargain. In this whole sphere of 
exchange, the just and comprehensive rule always 
will be, that when men exchange services with each 
other, each party is bound to look out for his own 
interest, to know the market- value of his own ser- 



ox LABOR. 125 

vice, and to make the best terms for himself which 
he can make. Capital does this for itself, and la- 
borers ought to do this for themselves, and if they 
are persistently cheated in the exchange, they have 
nobody to blame but themselves. Government 
should give them all facilities for intelligence : 
they should give themselves a character, and cher- 
ish a hearty self-respect, which there is nothing in 
their position to diminish : towards such laborers, 
capital occupies no vantage ground in an exchange 
of mutual services. 

Public opinion can do something towards better- 
ing the wages of labor, in countries where they are 
low, by organizing means to assist the laborers in 
distributing themselves at points where their ser- 
vices are most in demand. Societies in our sea- 
board cities, whose object it is to aid immigrants to 
pass on from those cities where labor is very abun- 
dant, to the country towns and to the West, where it 
is relatively much less so, are commendable in their 
purpose and spirit. So also are emigration societies, 
in countries situated as Ireland has been, where cen- 
turies of misgovernment combined with centuries of 
ignorance, produced a temporary pressure of popu- 
lation on the means of support. Where such pres- 
sure exists, as it does also in China, it is a good 
thing for public opinion to be favorable to emigra- 
tion to newer and more fortunate countries, and 
liberally to assist in the disti'ibution of labor to those 
points, wherever they may be, where capital is ready 
and anxious to employ it. 

It may surprise some who are familiar with books 
on Political Economy, that I do not here adduce the 



126 ELEMENTS OF POLITICAL ECONOMY. 

influence of public opinion in restraining population 
as favorable to wages, and inveigh against the force 
of that spring of population which the Creator has 
coiled up in the nature of man, as compared with 
the weakness of that power by which the earth pro- 
duces sustenance for man. In respect to the law^ of 
population and of human fecundity, I have only to 
say, that it is just that with which God saw best to 
endow the race; that experience has shown that it 
is not too strong for the purpose for which it was 
given; that under it, men are bound to act rationally 
and religiously, as accountable to God ; that the 
same law of population which produces laborers, 
produces capitalists as well, and that the restraints 
on population, which economists have been at such 
pains to commend, are as likely to keep capitalists 
out of the world as laborers, which would be a dis- 
advantage to the latter ; that every human being is 
as much constituted by nature to receive services as 
to render them, and therefore, until it is demon- 
strated that the earth can no longer support the 
population that is in immediate prospect, no sound 
commercial reason can be given for artificial re- 
straints on population ; and finally, that Political 
Economy, as the science of exchange, presupposes 
the actual existence of men in society, and there- 
fore, that it is without its province to discuss the 
laws under which they are born into society, and 
especially without its province to discuss the future 
possible contingency, nowise likely to happen in ac- 
tuality, when the broad bosom of mother earth shall 
be unable any longer to nourish and support her 
children. In saying this, I would not be understood 



05T LABOR. 127 

to deny that in certain states of society, in certain 
parts of the earth, population has pressed heavily 
upon food ; or that poverty and improvidence do 
sometimes stimulate population, or that intelligence 
and self-respect are needful to order that marriages 
may be well and wisely contracted. What I affirm 
is, that, under freedom to receive and render ser- 
vices, to which freedom all men have a natural right, 
and under intelligence and morality, which all men 
are bound to possess, this matter of population will 
perfectly regulate itself; that there is no prospective 
and calculable danger that population will ever out- 
strip the means of supporting it; that the popula- 
tion of the world, as a whole, was never so well fed 
and clothed and housed as it is to-day ; that the 
alleged laws of nature in respect to the increase of 
population and of food, which are said to be in an- 
tagonism, have never yet been proved ; and that, in 
any actual case of persistent pressure of numbers 
on the means of life, it is, to say the least of it, 
quite as reasonable to look for the causes in the 
miscalculations and maladministrations of men, as 
in alleged colliding laws of God. 

But will not strikes accomplish that for the raising 
of wages which neither government nor public opin- 
ion can effect? A strike is a combination among 
workmen for an Increase of wages. They agree to 
stop work altogether until their employers shall com- 
ply with their terms, and raise their wages to a cer- 
tain definite sum. It is not to be denied that work- 
men thus possess, under many circumstances, a very 
considerable reserved power which they can bring to 
bear upon their employers. When the processes of 



128 ELEMENTS OF POLITICAL ECONOMY. 

production are going briskly forward, when the man- 
ufactory is thoroughly furnished with competent 
hands, and profitable orders are in waiting, it is no 
laughable thing for the owner to be told, of a cloudy 
morning, that his hands have all stopped work, and 
refuse to lift a finger, until he shall agree to pay them 
wages at a rate which they themselves dictate. Of 
course, his first impulse is to discharge every man of 
them, and endeavor to fill his factory with new hands. 
But this he cannot always do. At best it will take 
time. Meanwhile his wheel or engine must be idle, 
customers be lost, orders unfilled, and profits no- 
where. And so, many an employer has surrendered 
to a strike, when he felt that it was all unjust, rather 
than undergo a still greater loss. It is admitted that 
workmen may sometimes strike and gain their point, 
but it is none the less true for all that, that strikes 
are false in theory and pernicious in practice ; that 
they spring from utter misapprehension of the true 
principles of wages ; that they embitter relations 
between employers and employed which ought to be 
cordial and free; and that they rarely or never are 
permanently advantageous to the workmen them- 
selves. 

In the first place, then, strikes are false in theory. 
It is a very old adage, that it takes two to make a 
bargain. Express this in the language of Political 
Economy, and it wiU take this form : When two 
men have mutual services to exchange, let them 
come to a fair agreement as to the terms on which 
they will exchange. Certainly, let each make the 
best terms he can, but let the bargain ahvays be free. 
If one party, who happens to have the p5wer to do 



ON LABOR. 129 

it, uses compulsion upon the other, it ceases to be a 
bargain at all, and becomes a sort of robbery. If, 
driving with my good horse along a lonely road, I 
meet another man driving an inferior one, and he, 
being the stronger man, compels me to exchange 
horses, it may be all very well for him, but I protest 
that it is no bargain. It is robbery. Now, workmen 
bring a certain valuable service to the market, just 
such a service as the capitalist wants, and he has to 
offer just such a service as they want, namely, wages. 
Now let them come to a free and fair agreement on 
the terms of their exchange. Let the workmen by 
all means make the very best terms they can ; let 
them insist to the last penny on all which they can 
get elsewhere, for the value of their service is deter- 
mined, as the value of every other service is deter- 
mined, by what it will bring. Let the employer dp 
the same. Let a fair bargain be struck. There is 
no objection to this kind of striking; and the more 
intelligence and skill and self-respect a workman has, 
the better prepared he is to strike the bargain and 
secure his just due. K the employer will not yield 
him this, let him have done with it at once, and go 
elsewhere. Or, if a just bargain has been struck, 
and afterwards circumstances shall so alter that he 
thinks he can rightfully demand more, let him frankly 
demand it, remembering always that it is an ex- 
change he has to do with, and that it takes two to 
make a bargain. If he does not get for his service 
what he thinks he ought to get, let him quit. He 
has a perfect right to quit. All this is legitimate 
and fau' and above board. 

But a strike is wholly different. This brings com 

9 



130 ELEMENTS OF POLITICAL ECONOMY. 

pulsion into play. A combination among workmen 
to leave an employer in the lurch, and especially a 
combination which forces into its ranks by cajoling 
or menaces, those who are unwilling to join it, is of 
itself a confession of the injustice of the claim. If 
the claim be just, there is no occasion to extort it. 
If the value of the service rendered be equal to the 
sum demanded, if this can be obtained elsewhere, 
there is no need of consultation and conference, com- 
bination and conspiracy. Let each man go quickly 
where he can get the most for his service. The fact 
that this is not done, that means are brought to bear 
upon the employer which are not ordinarily used in 
bargains,— means of the nature of a threat — that 
the justice of the claim is not relied on in a case 
where, more than anywhere else, justice can enforce 
itself, that full and free explanations are not had, 
that no notice is given, that great damage is ex- 
pected by their action to accrue to the employer, all 
this seenfis to forget that the transaction between 
employers and employed is a case of pure exchange, 
a simple bargain of one service against another ser- 
vice. Therefore, I say, that strikes are false in 
theory. 

But this is not the worst of it. Strikes are per- 
nicious in practice. And the grand reason for this 
is they tend to lessen the wages-fund. The produc- 
tion of all material commodities is a joint process. 
Capital and labor both conspire in it. The gross 
returns belong wholly to the capitalists and the labor- 
ers. The profits of capital and the wages of labor 
are paid out of these returns and from no other 
source. It is for the interest of both capitalists and 



ON LABOR. 131 

laborers that these returns be as large as possible, 
because they are wholly divided between the two, 
and if the whole be large the parts will also be large. 
Profits being taken out, the rest is wages-fund ; or, 
more strictly speaking, wages-fund being taken out^ 
the rest is profits. It makes no difference practically 
that the wages have been advanced to the laborers 
while the production was still going forward, since 
the wages really come' out of the proceeds of the 
joint process. The capitalist never means to pay 
wages out of his previous accumulations, and ought 
not to be expected to do so, and were he obliged to 
do so, it would soon be worse for the laborers, since 
these accumulations are the only stock which sup- 
ports labor. It is not only just but needful for the 
laborers, that wages shall be paid out of the pro- 
ceeds of that on which labor is now expended. 
Whatever, then, tends to lessen these proceeds, 
necessarily lessens the wages-fund. Any interrup- 
tion of the process of production by strikes, any 
want of full and hearty cooperation between the two 
parties to the joint process, will, if continued, infalli- 
bly make the wages-fund smaller. 

Suppose it takes three months to realize the re- 
turns in some branch of manufacture. If, when the 
workmen are paid off at the end of one three months, 
they all strike at the beginning of the next, and both 
parties hold out for three months, what is now the 
chance for higher wages ? It shall go hard even if 
they get as much as before. And why? Because 
the mill has stood idle, and the fund out of which 
alone wages are paid has not been created. The 
capitalist has lost all his profits, and they have lost 



132 ELEMENTS OF POLITICAL ECONOlilT. 

all their wages for three months, and nowwhen they 
come to begin again, wages are to be advanced, not 
out of a fund already in existence as it would have 
been, but out of a fund not yet created. The em- 
ployer is by no means in as good position to raise 
the wages as before the strike. He has lost profits 
which he might have put back into his business as a 
part of a new wages-fund. He has lost customers 
by the strike, and his business relations are all dis- 
arranged. His workmen by inflicting a loss upon 
themselves have found an opportunity of inflicting 
a loss upon him. Their loss is undoubtedly the 
greater of the two. Therefore, I say, strikes are 
commonly, and almost necessarily, a disadvantage 
to the workmen themselves. The case just put is a 
strong case to show the principle involved, but all 
interruption whatever to the processes of production 
by strikes, all consequent embittered relations be- 
tween employers and employed, all want of hearty 
working together of the labor with the capital, tend 
to diminish the gross returns, and consequently, both 
the wages-fund and profits. As far as this point is 
concerned, there is no sense or reason in the common 
jealousy of workmen towards employers. There is 
no real antagonism between them. Their interests 
lie along the same line. They are partners in the 
same concern. Workmen who are intelligent, pru- 
dent, skilful, will infallibly get their due. Employ- 
ers who are humane, urbane, fair, will find their 
account in it. 



ON CAPITAL. 133 



CHAPTER VII. 

ON CAPITAL. 

The three requisites of production are labor, 
power-agents, and capital. Of the first we have 
now learned what can be learned, without attending 
in turn to its counterpart — capital ; of the second 
we have learned already that all the powers of Nature 
work gratuitously in the service of man ; and of the 
third, we are now to learn what it is, how it arises, 
how it works, and what its influence is upon the 
progress and amelioration of society. Political econ- 
omy is able to show that there is no natural opposi- 
tion of interest between capitalists and laborers ; 
that capital is just as dependent on labor as labor is 
dependent on capital; that each is equally interested 
in the prosperity of the other, and that thus a deep 
and admirable harmony subsists in this part, as in 
every other part, of the social organism. 

Capital is any product reserved to be employed in 
further production. This definition will be found to 
cover all the cases, to obviate many difficulties, and 
to take the life out of many disputes. Mr. Carey de- 
fines capital as the instrument by means of which 
man obtains mastery over Nature, including in it 
the physical and mental powers of man himself, 
and thus needlessly confuses the boundaries between 
capital and labor. It is much simpler and better to 



134 ELEMENTS OF POLITICAL ECONOMY. 

define labor, as has already been done, as physical 
or mental exertion for the sake of a return, and to 
define capital, as is now done, as any product out- 
side of himself reserved by man for further produc- 
tion. There are many products devoted to immediate 
consumption ; that is to say, to the gratification of 
present desires, without any reference to the render- 
ing of future services by means of their help. Such 
products are not capital. They are a portion of the 
wealth of the community, they are valuable, but 
capital they are not. All capital is wealth, but all 
wealth is not capital. Only that portion is capital 
which employs, assists, and pays for labor. All raw 
materials are capital, all machinery is capital, all 
funds destined to purchase these, and all funds des- 
tined for wages, are capital. As all values reside in 
services exchanged, so all capital resides in services 
accumulated with reference to an ultimate exchange. 
It is only in the intention of the owner that capital 
can be discriminated from other products destined 
by him for the gratification of himself and his family, 
or for benevolent purposes. Take a hardware manu- 
facturer, for example, and he has a stock on hand of 
finished hardware, a part of the proceeds of which 
he will put back into his business in the form of 
materials, tools, and wages, and another part will go 
in the form of personal and family expenditure, and 
it is only his intention that discriminates the first 
part, which is purely capital, from the second part, 
which, as far as he is concerned, is not capital at all. 
It may indeed become capital in the hands of those 
to whom he pays it out ; and will become so, in case 
they destine it as an aid to further production in 



ON CAPITAL. 135 

their several lines of business. The whole mass 
of capital, then, in any country, is the whole mass of 
those products, of whatever kind, which are destined 
in the mind of their owners to be retained as an aid 
towards rendering future services to society. 

How does capital arise ? We have seen that 
there are obstacles which lie in the way of the grati- 
fication of men's desires in all directions, and that 
these obstacles can only be removed by human effort. 
When a man devotes himself to one set of these 
obstacles, with a view to surmount them, he is not 
long in discovering, that if he had certain tools, his 
work would be greatly facilitated ; and having dis- 
covered that, it will not be long before he will at- 
tempt himself, or induce others to attempt, to invent 
such tools. The beaver gnaws down the tree with 
his teeth, from generation to generation ; but man is 
a being more nobly endowed than the beaver, and 
no sooner had he occasion to fell trees, than some- 
thing of the nature of an axe suggested itself to his 
ingenuity. It is true, that his earliest attempts at 
axe-making were probably of the rudest sort, but 
just as soon as anything was devised, whether of 
flint or shell or metal, that rendered easier the labor 
of felling a tree, capital made a beginning along that 
line of obstacles. Among the more gifted races, 
progress in this direction was perhaps more rapid 
than we are wont to think it was, since Tubal-cain, 
even in the times before the flood, is said to have 
been " an instructor of every artificer in brass and 
iron." At any rate, we are at no loss to explain the 
origin of capital : it is found in the motive that 
exists everywhere, and that always existed, to lessen, 



136 ELEMENTS OF POLITICAL ECONOMY. 

if possible, a given irksome effort that is the condi- 
tion of a given satisfaction. And this origin of 
capital gives the key-note to its universal use and 
indefinite expansion. Tools are invented and em- 
ployed for no other reason than this, that, by means 
of their help, the human effort is lessened relatively 
to a given satisfaction. The powers of Nature, 
vphich grow the grain, which brings down the tree, 
which turns the wheel, which impels the locomotive, 
which sends the message round the world, all stand 
ready to slave in the service of man ; but in order to 
make their aid available for human purposes, there 
must be a plough, an axe, a wheel, an engine, an 
electric machine. These, and all other implements 
whatsoever, from the tiniest needle to the most pon- 
derous engine, are products created and retained for 
the sake of further production. They are capital. 
They are not capable of yielding in themselves 
an ultimate satisfaction to human wants, but they 
mediate between the powers of Nature, which they 
enable us to make available for our purposes, and 
those ultimate satisfactions. Nature furnishes all 
the powers, and all the natural qualities of objects, 
but labor can go but a very little way towards 
making these available for the satisfaction of human 
wants, without the aid of implements and contri- 
vances which are produced by labor ; and which, 
being retained as an aid to future labor, are capital. 
Since it requires tools to make tools, the progress of 
capital at first was very slow ; but, since every ad- 
vance in mechanical contrivance makes still further 
advances easier, there is a natural tendency, which 
facts abundantly exemplify, to a more and more 



ON CAPITAL. 137 

rapid progression in the number and perfection of 
all implements of production. The same motive 
that impelled to the first invention, has impelled to 
the whole series of inventions since, and will con- 
stantly impel to further inventions till the end of 
time. This motive, — and there is no motive that 
actuates man more universal, — is, to lessen the 
onerous effort of human muscle, and to throw upon the 
ever-willing shoulders of Nature more and more of the 
burden of production. Every step of this progress 
gives birth to a larger and larger proportion of satis- 
factions relatively to efforts ; marks an increasing 
control on the part of man over the powers of 
Nature ; and gives promise for the time to come of 
greater advantages still in both these two directions. 
And it is because capital brings gratuitous natural 
forces into service, and the more so as capital pro- 
gresses, that the value of those things created by the 
aid of capital tends constantly to decline as com- 
pared with the value of those things, in whose pro- 
duction capital less conspires ; and in the chapter 
following the next will be developed from this point 
one or two important laws of value. 

Now, then, having seen what capital is, and the 
human motive that brings it forward in production, 
we next inquire after its remuneration. Tlic remu- 
neration of capital is technical/// called profits: just 
as wages are technically the remuneration of labor. 
The present proposition is, that profits are the legiti- 
mate reward of a service, just as much, and in the 
same sense, as wages are the legitimate reward of a 
service. The distinctive service of the capitalist as 
such, as distinguished from the service of the laborer, 



138 ELEMENTS OF POLITICAL ECONOMY. 

consists in his voluntary abstinence from the use and 
enjoyment of that which he contributes in aid of 
further production. If a man puts a thousand dol- 
lars, which he might spend upon his immediate 
gratifications, into a machine to be used in his busi- 
ness, the money immediately becomes capital ; the 
owner practices abstinence, and for this abstinence 
justly expects a reward. This reward we call profit. 
The expected profit is the only motive for the absti- 
nence. He will not be content simply to get his 
thousand dollars back, for that he has now : he must 
have his thousand dollars with a profit. Suppose A 
to be a manufacturer of flax fabrics, B to be a farmer 
in his neighborhood, and C an expert mechanic ac- 
quainted with the current modes of spinning and 
weaving flax. A has a capital of $10,000 invested 
in his business, in buildings, machinery, materials, 
and wages-fund, which nets him $1000 a-year clear 
profit. At the end of the year, the question with 
him is, whether he shall spend this $1000 unproduc- 
tively in immediate gratifications, or, adding it to 
his capital stock, increase his business with it. If 
he concludes to do the latter, he must forego the use 
and enjoyment of his $1000 for the present, he must 
practise abstinence ; and this he will not do, and 
ought not to do, except in view of increased profits 
to accrue from his business at the end of the next 
year. If more flax is to be spun and woven in his 
factory, more money must be invested to buy more 
materials, to pay more laborers, or to pay for more 
or better machinery. His contribution to the pro- 
spectively increased production is $1000, transformed 
by his intention from simple property to capital, 



ON CAPITAL. 139 

devoted to production by a voluntary abstinence 
from its present use and enjoyment, in view of a 
future reward or profit. It is a service rendered by 
one man to a joint process to be performed by many, 
and gives him a just claim to a portion of the prod- 
uct. Is exertion irksome ? So is abstinence. Are 
wages legitimate ? So are profits. B as a farmer 
might devote all his fields to growing food and fruits 
for the gratification of himself and family, but since 
A now wants more flax fibre for his factory, he gives 
up a part of his acres to growing flax, and this be- 
comes a part of A's capital in the form of raw ma- 
terial ; and the money received for it may become 
capital in B's hands by being spent either in agricul- 
tural improvements, or in buying additional land. 
The mechanic C, by giving time, exertion, and 
money to the work, may invent an improved ma- 
chine for spinning flax, to be introduced into A's 
factory. The machine becomes a part of A's capital, 
and the money paid to C for his machine is partly 
wages, a reward for the labor bestowed on its con- 
struction, and partly profits, to replace to C the 
money used in making the machine, together with a 
reward for his abstinence from the use of this money 
until the machine was sold. Thus we see that capi- 
tal, whether in the form of wages-fund, materials, or 
implements, is always the result of abstinence ; and 
that whoever abstains from the present enjoyment of 
anything, in order that that something may contribute 
to a future production, renders an essential service ; 
and, consequently, that the reward of such absti- 
nence, or profit, is just as legitimate as are wages. 
This is very clearly seen in the common case in 



140 ELEMENTS OF POLITICAL ECONOMY. 

which one man loans capital to a second, to be used 
by that second in his own business. Brooks has a 
thousand dollars in hand which he is at liberty 
either to enjoy un productively, or to employ himself 
productively, with the assurance of a profit ; but is 
willing to forego the use of it for a year in favor 
of Smith, who is anxious to enlarge his business. 
Brooks' abstinence is a clear service to Smith ; and 
at the end of the year, therefore, Smith not only 
refunds the thousand dollars borrowed, but also sun- 
dry other dollars besides as a specific reward for this 
specific service. If Smith keeps the money ten years 
or twenty, it is no more than just that he should pay 
this sum every year till the principal is refunded, 
because the service is every year repeated, the ab- 
stinence is still practised in his favor. Therefore, 
capital once acquired by abstinence, becomes, if the 
abstinence be continued, a legitimate source of per- 
petual revenue to the owner, as well as a perpetual 
source for the maintenance of laborers. Whoever 
transforms his property into capital, establishes there- 
by a permanent fund whence he may draw an in- 
come, and laborers support, in perpetuity ; because 
the capital, though constantly disappearing in pro- 
duction, as constantly reappears in products, with 
profits added : a fact which shows the folly of the 
popular opinion which regards more favorably the 
man who spends his money freely and unproduc- 
tively, than the man who, turning his money into 
capital, building a mill, or making other permanent 
investments, creates by that means a fund in the 
community, out of which permanent wages and 
permanent profits can be paid. The strength of the 



ON CAPITAL. 141 

motives to abstinence in any country will depend 
largely upon the character of the government, and 
the organization of society there ; these motives 
being generally strongest where liberty of action, 
equality of privileges, and security of property are 
the greatest. 

We turn now to the relations of capital to labor, 
and to that law of the distribution of the products 
between capitalists and laborers, which was first 
promulgated by Mr. Carey, and which of itself fully 
justifies his claim to be regarded as an important 
contributor to the science of Political Economy. As 
I regard some of the positions of Mr. Carey as fun- 
damentally erroneous, and shall freely animadvert 
on them in that view, I wish at this point to bear 
testimony to his great merit as the original dis- 
coverer of the beautiful law of distribution, in the 
light of which the future condition of the laboring 
classes in all countries, if they are only true to 
themselves, seems hopeful and bright. Capitalists 
are interested in profits, and laborers are interested 
in wages ; is there, then, as is commonly supposed, 
a deep-seated antagonism between them ? None 
whatever. No profits can be realized unless labor 
be united with the capital, because it is labor alone 
that works up the raw materials, tends the ma- 
chinery, and disposes of the products. Capital not 
united to labor remains barren, giving birth to no 
profit, nay, itself commonly becoming less. At any 
rate, the idle mill and hoarded gold yield no profit. 
Without the profit there will be no capital ; since 
no man will practise abstinence without the hope 
of a reward : but without the labor there will be no 



142 ELEMENTS OF POLITICAL ECONOMY. 

profit ; and therefore the very presence of capital in 
any community, constitutes of itself a demand for 
labor. The more of capital in any community, the 
greater the demand for laborers, since it is through 
laborers alone that the profits are realized. But the 
greater the demand for laborers, the greater the re- 
ward of labor ; and, therefore, laborers as such, are 
interested in nothing so much as in the increase of 
capital, and in the strength of those motives to ab- 
stinence, out of which capital springs. 

Capital must have laborers. Laborers desire re- 
munerative employment. It is the old case of values 
over again. Labor offers a service to capital, and 
capital offers a service to labor. They exchange to 
the mutual advantage of both, and one is as inde- 
pendent as the other. Hold up your heads, work- 
men! You offer an honorable service, on which 
capital is absolutely dependent for its existence. 
You offer a service as legitimate and as respectable, 
as that of the clergyman who preaches your ser- 
mons and baptizes your children, and are paid on 
precisely the same principles. Do not feel too much 
stuck up towards your workmen, employers! The 
money you render them is no whit better than the 
work they render you. The exchange is honorable, 
and the parties to it on the same level of advantage. 
They are as necessary to you as you are necessary 
to them. As a capitalist, you cannot exist without 
them ; as laborers, they cannot exist without you. 
You are one blade of the shears, they are the other 
blade, and it takes both blades to cut. It is absurd 
to ask which blade cuts most, because there is no 
cutting at all, unless both blades work together. 



ON CAPITAL. 143 

More than this. Capital and labor are not only- 
essential to each other, but also each is bettered by 
the prosperity of the other. If capital realizes a 
good round rate per cent., every capitalist is anxious 
to enlarge his business, whether as lender or active 
operator, and employ as much of his wealth as pos- 
sible, as capital. This process increases capital. If 
men constantly put their profits only back into their 
business, which, under a high rate per cent., they 
will be pretty sure to do, capital rapidly increases. 
But increase of capital is, in its very nature, an 
increased demand for laborers. An increased de- 
mand for laborers, other things being equal, infal- 
libly raises wages ; just as an increased demand for 
anything else raises its value. Therefore, laborers 
are directly interested in the prosperity of capital, 
because the prosperity of capital leads to its in- 
crease, and its increase leads to higher wages. As 
a matter of fact, high profits and high wages, so far 
from being incompatible, usually accompany each 
other. 

But is the capitalist equally interested in the pros- 
perity of laborers ? I think so. That he has to pay 
high wages is not necessarily a dead loss to him. 
This is no game of grab, in which what one gains 
another loses ; it is a case of joint production, in 
which two parties conspire, and in which whatever 
helps to enlarge the gross amount produced, helps to 
increase the share falling to each party. If then, as 
they undoubtedly do, high wages tend to make the 
workmen more intelligent, industrious, frugal, and 
inventive, they are not a loss to the capitalist, but a 
gain. Larger gross returns are thereby secured. 



144 ELEMENTS OF POLITICAL ECONOMY. 

Improved intelligence and skill of workmen affect 
production, just as improved machinery, secured by 
the aid of capital, affects it. Both alike enlarge the 
aggregate of products to be divided between capi- 
talist and laborer. Now, in the division of products 
thus rendered larger in amount, what hinders capital 
from getting a fair share ? When a firm is prosper- 
ous, are not all the partners benefited ? All that is 
produced is to be divided ; if more is produced, 
more is to be divided. Intelligent, industrious, skil- 
ful workmen, are best for production, are best for 
the capitalist, and therefore, high wages, which tend 
to make them so, and which arp a consequence of 
their being so, are to be paid without grudging. 
When the matter is sifted to the bottom, it is seen 
that capital is as much interested in the prosperity 
of labor, as labor is interested in the prosperity of 
capital. All legitimate interests are in harmony. 

I am now prepared to prove that all increase of 
capital, while it redounds to the benefit of capital- 
ists, redounds in a still higher degree to the benefit 
of laborers. The demonstration is Mr. Carey's, and 
is the law of distribution above referred to. The 
proof is this. The rate per cent, of profits invaria- 
bly goes down as a country grows older and richer. 
This is a simple fact of history, which no one will 
dispute. It has been exemplified alike in ancient 
and in modern times, so that one is at a loss whence 
to take the best examples, when all the examples are 
so good. In England, three centuries ago, the legal 
rate of interest was ten per cent., while now the 
average rate is barely four in that country, and 
lower still in Holland. During the first years of 



ON CAPITAL. 145 

mining operations in California, from eight to fif- 
teen per cent, a month, with security of real estate, 
was paid for the use of money, which enormous 
rates have now declined to rates not much higher 
than those paid in the States along the Mississippi 
River, and in these also the rates are constantly 
approximating those current in the older Eastern 
States. It may be assumed, therefore, as an indis- 
putable fact, that, as capital increases, the rate per 
cent, for its use tends steadily to decline ; but, while 
less profit is received on every hundred, there are 
also more hundreds, and consequently, there is an 
absolute gain to capitalists as a class, and both an 
absolute and relative gain to the laborers. Let us 
take to figures. While capital stands at $100,000,000, 
let the rate of profit be six ; when it rises to $500,000,- 
000, the rate goes down, say, to four. The value 
of the products to be divided at the end of the year, 
will be represented respectively by $106,000,000 and 
$520,000,000. In the first case, $6,000,000 is profits, 
•and $100,000,000 is w^ages. In the second case, 
$20,000,000 is profits, and $500,000,000 is wages. 
Here is an absolute gain to capitalists. Profits have 
gone up from six to twenty millions, are more than 
three times as great as before. But wages have gone 
up both absolutely and relatively. They have risen 
from one hundred to five hundred millions, and are 
five times as great as before. Profits have risen in 
the ratio of one to three, but wages in the ratio of 
one to five. This arithmetical example is put for 
the sake of illustration, but the principle holds good 
in every case where the rate per cent, goes down 
in consequence of the increase of capital, and there- 
10 



146 ELEMENTS OF POLITICAL ECONOMY. 

fore the advantages of ever enlarging capital are 
even greater to the laborers as a class than to the 
capitalists themselves. Most assuredly, if capital 
now takes less out of every hundred, more is left to 
labor. Profits and wages are reciprocally the leav- 
ings oi each other, since the aggregate products 
created by the joint agency of capital and labor are 
wholly to be divided between them. This demon- 
stration is extrerfiely important; for it proves beyond 
a cavil, that the value of labor tends constantly to 
rise, not only as compared with the value of the 
material commodities which, by the aid of capital, 
it helps to create, a truth we have seen before, but 
also as compared with the value of the use of its 
co-partner capital itself ; and therefore, that there is 
inv;^rought in the very nature of things a tendency 
towards equality of condition among men. God 
has ordered it so.' Self-interest is indeed the main- 
spring of movement in the economic world ; but no 
man can labor intelligently and productively under 
its influence, without at the same time benefitting- 
the masses of men. His very savings, productively 
employed, are the poor man's wealth. 

It only remains to speak of the forms which capi- 
tal assumes, and to divide these, in general, into 
circulating and fixed capital. Circulating capital 
comprises all those products which, in rendering aid 
to further production, are capable of but a single 
use in their present form. Such are (1) all raw ma- 
terials ; (2) funds destined for wages ; (3) products 
on hand for sale, whose proceeds are destined as an 
aid to further production ; (4) products loaned or 
rented, or retained for that purpose. Fixed capital 



ON CAPITAL. 147 

comprises all those forms of capital which are capa- 
ble of repeated use in the processes of production. 
Such are, (1) all tools and machinery ; (2) all build- 
ings used for productive purposes ; (3) all improve- 
ments upon land; (4) all investments in aid of 
locomotion, such as railroads, canals, ships, and 
everything subsidiary to these ; (5) the national 
money. " The test of fixed and circulating capital 
is the inquiry. Are returns secured by the retention, 
or by the transfer, of the particular product?. Tools 
in the hands of him who uses them are fixed, in the 
hands of him who manufactures them, circulating 
capital." 1 

As civilization advances, and the aggregate of all 
forms of capital enlarges, there is a tendency towards 
a relative increase of fixed capital, as compared with 
circulating. There may, indeed, at times, be a trans- 
formation of the one kind of capital into the other, 
too rapid for the general interests of production, as 
was seen both in this country and in England about 
the year 1847, when such an amount of money was 
permanently invested in railways and similar im- 
provements, as to drain unduly the loan markets in 
both countries, as to bring on a commercial crisis in 
each, and as greatly to depress the value of these 
permanent investments, thus multiplied beyond the 
immediate wants of business, whose activity was 
besides curtailed and disturbed by the necessary ex- 
penses of their construction. It has been estimated, 
that at the present time, the proportion of circu- 
lating capital to fixed in France, is one to eight ; in 

1 Bascom's Political Economy, p. 71. 



148 ELEMENTS OF POLITICAL ECONOMY. 

England, one to three ; in the United States, three 
to five ; proportions which are believed to be much 
higher in favor of fixed capital than formerly ob- 
tained in those countries.^ 

1 Carey's Social Science, iii. 56. ■' 



ON LAND. 149 



CHAPTER VIII. 

ON LAND. 

The crucial test of a definition, a generalization, 
a theory, is found in those seemingly anomalous 
cases with which all science has to do, and which 
come with such apparent reluctance under her pains- 
taking classifications. If a definition given, or a 
generalization propounded, reduce into order these 
outlying cases without violence, as well as cover 
easily the more central phenomena, there is at once 
created a strong presumption of their truth. Does 
it cover all the cases ? Does it account for all the 
observed facts ? These are tests of definitions and 
of theories. The questions relating to the value of 
land and of its products have been among the most 
vexed questions of Political Economy, have exer- 
cised a vast amount of ingenuity, have led to careful 
and commendable observations and investigations 
in the whole field of agriculture, while the diverging 
views that have been taken, the arguments adduced, 
the conclusions drawn, and the spirit manifested, 
in these discussions, form the most unrefreshing 
portion of the history of the science. These ques- 
tions, however bitterly debated in the past, are 
approaching, even if they have not already reached, 
a satisfactory solution. The value of land and of 
the products of land have been almost uniformly 



150 ELEMENTS OF POLITICAL ECONOMY. 

regarded in the theories of wealth as anomalous 
matters, to which peculiar principles are applicable, 
and from which certain conclusions are dedacible, 
which color and modify results and prospects in the 
whole field of value. Adam Smith, Ricardo, Mc- 
Culloch, Senior, and Mill hold substantially one set 
of views on land and its rent. Carey and Bastiat 
hold views on that subject almost totally at variance 
with the English writers ; it seems to me that the 
means are at hand for combining what is true in 
these opposing views in a clear and consistent man- 
ner, and for settling the dispute. I feel sure that 
both parties are right in many respects, and are 
wrong in some respects, and am not without some 
hopes of being able in this- chapter to reconcile the 
difference, and to show that the value of land and 
the rent of land are not anomalous cases of value, 
but arise from human services rendered and ex- 
changed, just as all other value arises, and vary 
under the same laws as vary all other values. 

A series of propositions, and discussions under 
them, will bring out what seems to be the truth in 
this whole matter. 

1st. The whole earth with all its productive powers 
was given to men gratuitously of God under the sim- 
ple direction that they replenish and subdue it. 

No provision was made for particular ownership. 
The whole earth, thus bestowed without partiality 
upon a whole race, had in all its spontaneous prod- 
ucts a great utility, but, for a time, no value what- 
ever. The spontaneous fruits, when gathered by 
any person, might become thereby possessed of value 
from his effort expended, but to the land itself, on 



ON LAND. 151 

which no human efforts had been expended, the 
idea of value could not have attached. No man 
would have thought to say to another under such 
ch'cumstances, This field is mine : give me some- 
thing for it, and you shall have it ; and if he had, 
that other would not give it, because such fields 
were open on every hand to his occupation gratis. 
It is not in human nature to render anything for 
something which may be gratuitously obtained ; 
value has no place in a sphere where everything is 
free. But it is well worth while to notice, that under 
God's command, the earth was not only to be re- 
plenished but subdued. Under this word subdue, 
and under the work implied in that, came in the first 
idea of ownership in land. When a family com- 
menced this work of subjugation upon a piece of 
land, when they enclosed it, settled on it, tilled it, 
in any way whatever improved it by an expenditure 
of their own toil, then first dawned upon their minds 
the idea of possession, then first began the land to 
be possessed of value, since now the family would 
justly say to another. If you want this field, you 
must give us an equivalent for what we have ex- 
pended on it. If the transfer took place, is it not 
very plain that what was sold, was not the inherent 
qualities of the soil, but the services which had now 
been expended in its amelioration ? The first family 
received the soil and its powers gratuitously, and 
then expended a series of efforts on its improvement; 
but a similar series of efforts bestowed on other gra- 
tuitous land in the neighborhood would make it as 
eligible as this now is; if, therefore, the family in- 
sisted on more than an equivalent for their exertions 



152 ELEMENTS OF POLITICAL ECONOMY. 

actually bestowed on the land, the other would reply, 
For as much labor as you have given to your land, 
we can make other free land as good as yom's, con- 
sequently we can give you no more than a fair equi- 
valent for your efforts. The value therefore of the 
parcel sold, would be determined, not by the gratu- 
itous elements involved, but by the onerous elements 
involved, that is to say, by the efforts already made 
by the first family in connection with the land, as 
compared with the efforts of the second involved in 
the remuneration offered. It is not possible in the 
nature of things that God's bounty to the whole race 
should be thwarted by any number of individuals 
through exclusive appropriation on their part of this 
bounty. What they received gratuitously, they 
must gratuitously transmit; what they have wrought 
of permanent improvements on the land, they may 
justly demand a recompense for, and can secure it. 
By their expenditure of efforts they have saved to the 
purchaser a like expenditure of efforts, and for these 
they can demand, and he will be willing to concede, 
a recompense; but if they go further, and demand 
pay for the natural qualities of the soil which God 
gave and they have not improved, for the sun that 
shines, and the rain that falls on it, the demand is 
blocked at once by the common sense of the pur- 
chaser. He replies : There is land enough in its 
natural state, with inherent qualities as good as 
yours, the same sun shining on it, and just as much 
blessed rain falling on it, which I can have for noth- 
ing. I cannot give you something for that which 
costs you nothing, and which I can get for nothing. 
As long as there is abundance of land still open 



ON LAND. 153 

to occupation, everybody will concede that this line 
of argument is just, and that the general value of 
land cannot rise above the estimated measure of the 
human efforts actually bestowed on its improvement. 
Though less obvious at first, the principle is just as 
true after all the land has been taken up. Improved 
farms are always for sale in every country, lands 
once appropriated and ameliorated are perpetually 
changing hands, and men enough are always found 
willing to part with land, as with everything else, 
for what it has cost them. If some proprietors are 
unreasonable enough to try to intercept God's gifts 
bestowed alike on all the generations, and endeavor 
to exact a price for their land made up of compensa- 
tion for what they and their predecessors have done 
upon it, together with something added for what 
God has done for it, their cupidity is instantly 
thwarted by the readiness of others to dispose of 
their land for a fair equivalent of their onerous ex- 
ertions. Human motives are such, and everything 
is so providentially arranged in this department, that 
men cannot sell God's gifts ; it would be derogatory 
to the Giver, if they could. 

What might be thus inferred from the nature of 
the case, is abundantly confirmed by facts. As a 
matter of fact and experience, lands are absolutely 
valueless until some portion of human effort has 
been expended on them, or in reference to them. 
They may have utility, but they have no value. 
Nobody will give anything for them. The United 
States government has been selling for years some 
of the best lands in the world for one dollar and a 
quarter an acre, and this after the lands have been 



154 ELEMENTS OF POLITICAL ECONOMY. 

surveyed at government expense, local governments 
provided for the settlers, and mail facilities and other 
privileges guaranteed to them. The same govern- 
ment is now giving away similar lands in home- 
steads to actual settlers, merely taking a nominal 
fee for the title-deeds, whose aggregate amount does 
not begin to meet the expenses incurred in connec- 
tion with these lands. If lands had value, indepen- 
dent of human exertions, then would the English 
companies and individuals who received grants in 
the seventeenth century of vast tracts of as fertile 
land on this continent as the sun ever visited in his 
diurnal revoiutions, have become rich as Croesus ; 
but these companies and individuals did not become 
rich at all, but rather poor. The amount realized 
from the sale of their lands fell far short ofreimburs- 
ing the expenses of colonization; and, after incurring 
debts and endless vexations, most of the companies 
and proprietors were glad to be rid of their lands at 
any price. It is a current proverb now in regard to 
wild lands at the West, that the more a man has of 
them the worse off he is ; and it is a maxim also in 
the newer settlerrients everywhere, that improved 
lands are worth the present value of the improve- 
ments an^ no more. And Mr. Carey is at pains to 
prove at great length that the value of lands in all 
old countries is now vastly less than they have cost 
of actual human efforts in their subjugation and im- 
provement; less, because the progress of capital and 
inventions enables similar work to be done now at 
much less outlay. We conclude, then, that the value 
of land follows the law of all other values ; that it 
arises only in connection with human efforts ; that 



ON L.^^D. 155 

men cannot appropriate God's gifts in the soil, and 
then dole them out to other men for pay ; that land 
is no monopoly; that landed property, violence aside, 
rests back, like all other property, its ultimate defence 
upon the right of making efforts for one's own welfare, 
and of not parting with these efforts except for an 
equivalent ; that land and the use of it have value 
because the proprietor can by them render a service 
to somebody else ; and finally that the value and 
the rent of land vary, like all other values, under the 
law of supply and demand. 

2d. The powers of all land, under more laborious 
culture, agricultural skill remaining the same, are sub- 
ject to the law of diminishing return; in other words, 
increased labor upon it, though increasing the aggre- 
gate return of produce, does not secure an increase 
proportioned to the increase of labor. 

This is the fundamental proposition on which 
'Ricardo, and the English \\T:iters generally, lay such 
stress, and on which they found the law of Rent, and 
the necessity of restraints on population ; while 
Carey and Bastiat, impliedly if not expressly, deny 
the proposition, and of course, the inferences deduced 
from it. In my judgment, the proposition cannot 
be logically denied. The law of diminishing return 
from land is a law of Nature, and has played a very 
important part in the occupation and culture of suc- 
cessive portions of the earth's surface. The proof 
of the proposition is all the better for being short. 
If by doubling the labor on a piece of land, double 
the produce could be secured, and by quadrupling it, 
quadruple, and so on, there would be no reason why 
any man should ever cultivate more than a square 



156 ELEMENTS OF POLITICAL ECONOMY. 

acre, or even a square rod. He has a strong motive 
to confine his culture to a small space, just so long 
as the amount of produce is in the ratio of the labor 
expended, because there is less locomotion of tools 
and fertilizers and crops. The fact that he extends 
his culture from one acre to another, and then to 
distant acres, notwithstanding the inconveniences 
and expense of transportation, is an irrefragable 
proof of the proposition in question. Increase of 
agricultural labor and expenditure on a given space 
of land will secure a larger amount of produce, but 
as a general law, the increased amount will not be 
proportioned to the increased expenditure. If it 
were thus proportioned, if the law of diminishing 
return did not exist, then, for purposes of agricul- 
tural production, a square acre is as good as a con- 
tinent. 

It is through this law of diminishing return, that 
the Creator has secured the gradual occupation by 
men of almost the whole earth. There is a strong 
tendency to leave the old acres to advance upon 
new, the old countries to emigrate to new, when- 
ever the returns begin to bear a more unfavorable 
ratio to the labor bestowed. The farmer will ad- 
vance from the first to the second acre as soon as 
he thinks that more produce can be obtained from it 
by a given amount of labor than can be got by a 
like expenditure of additional labor upon the first 
acre, allowance being made for the increased incon- 
venience ; and so, cultivation has gradually extended 
itself, and men have become dispersed over the whole 
earth. Other principles leading to dispersion have 
undoubtedly cooperated, but this is the fundamental 



ON LAKD. 157 

one, operative at all times, changing the course of 
population, and consequently of empire. 

Mr. Carey seems to think that this proposition is 
dependent on another, and endeavors to break down 
this by an attempt to break down that other. That 
other proposition is, that in the course of occupation 
the best lands are entered upon first, and that after- 
wards recourse is had to the poorer soils. He at- 
tempts to prove that the exact reverse of this is the 
historical fact, that cultivation has always been 
begun upon the poorer soils, and that afterwards 
the river bottoms and strong lands have been drained 
and cleared and tilled. This discussion, however 
interesting in itself, is irrelevant as far as the law of 
diminishing returns is concerned, because that law 
is nowise dependent on the order in which soils of 
different productive power are entered upon in cul- 
tivation; it is true of all soils, whether rich or poor, 
whether entered upon in the order of their fertility, 
or in the inverse order ; and I cannot help thinking 
that Mr. Carey puts upon this matter of the order 
of occupation, which he asserts has always been 
from the poorer to the richer soils, an estimation 
altogether disproportioned to its importance. When- 
ever men have entered upon new countries, they 
have undoubtedly selected those lands first which 
seemed to them most eligible, reference being had 
of course to their present means of subduing them ; 
and whether these lands proved ultimately to be 
better or worse than other parcels which they might 
have chosen, is a point, which, however determined, 
has no effect to disturb the fundamental proposition 
in hand. 



158 ELEMENTS OF POLITICAL ECONOMY. 

Sd. The operation of the law of diminishing' returns 
is retarded hy all improvements in agriculture. 

The discovery of new and more available fertil- 
-izers, the invention of better agricultural implements, 
the light thrown by chemistry upon agriculture, the 
consequent adoption of better methods of culture 
and rotation of crops, the more perfect adaptation 
to the various soils of the kinds of produce sought 
to be raised from them, all these and similar im- 
provements tend to increase the ratio of the produce 
to the labor, and disguise the law just established. 
The lands that are now under cultivation may be 
made, under more skilful modes of culture, to yield 
indefinitely more than at present, and the vast still 
uncultivated lands of the world may come to render 
an incalculable quantity of food to the world's pop- 
ulation ; but yet, as improvements are naturally 
less continuous in this than in some other depart- 
ments of production, as invention has less play, as 
there is less opportunity for the division and cooper- 
ation of labor, as nothing can materially shorten the 
time during which the fruits of the earth must ripen, 
the value of agricultural products tends to rise rela- 
tively to manufactured products generally. Labor, for 
a reason already given, and produce, for the reasons 
now given, have risen and tend steadily to rise, as 
estimated in general commodities. 

^th. The rent of land is the ??ieasure of the service 
which the owner renders to the actual cultivator, and 
does not differ essentially in its nature from the rent 
of buildings in cities, or from the interest of money. 

Mr. Bicardo's famous doctrine of rent, is for sub- 
stance, this : there are some lands in every country 



ON LAND. 159 

whose produce just repays the expenses of cultiva- 
tion, and consequently yields no margin for rent ; 
and the cost of production on these rentless and 
poorest lands under cultivation, will determine the 
price of the produce ; and as there can be but one 
price in the same market, the produce raised on more 
fertile lands will be sold for the same price, and this 
price, besides paying the cost of production, will 
yield a rent rising higher according as the land is 
more fertile ; so that the rent paid on any land is 
always a measure of the excess of productiveness 
of that land over the least productive land under 
paying cultivation ; and therefore, an increased de- 
mand for food in consequence of increased popu- 
lation, and the higher price resulting, will force 
cultivation down upon still poorer soils, or else 
compel a higher culture for less remunerative returns 
on the old soils, according to the law of diminishing 
returns, which in either case will raise the rents on 
all the soils above that grade that just repays the 
expenses of cultivation, and no more ; so that it is 
the sole interest of landlords, as such, that popula- 
tion should be dense and food high, their interest 
being directly antagonistic to that of the other 
classes of community. 

This very ingenious and complicated theory, which 
is supported by many other authoritative names be- 
sides that of its author, is too mechanical and rigid 
to be applied to any existing state of facts. There 
is much truth in it, and some error ; and I believe 
that a few simple statements will embody the truth 
and eliminate the error. It is not true that there is 
but one price in the same market ; prices vary in the 



160 ELEMENTS OF POLITICAL ECONOMY. 

same market, and are shifting perpetually in all 
markets. Produce is not always sold for money, 
but is frequently exchanged directly against other 
commodities and services. The theory makes no 
allowance for the food imported, or which may be 
imported, from abroad. As I understand it, the 
whole truth in regard to rent is nearly this : Land is 
an instrument for certain productive purposes ; has 
been prepared to answer these purposes by human 
efforts. These efforts only are to be remunerated from 
the use of the instrument; if the owner allows another 
the use of it, he justly demands a recompense for 
the use of an instrument which has cost him efforts ; 
this recompense is rent ; it is the reward of a service 
rendered, just as profit is ; there is no gauge by 
which to measure the amount of rent except the 
degree of service rendered ; this is very variable in 
lands, owing to various causes, such as proximity to 
markets, natural fertility, state of improvements, and 
so on ; the rent of land then depends on the quality 
and situation of the instrument ; it differs nowise in 
principle from the rent of other instruments which 
are wholly made by labor ; the range of landed rents 
is up and down, a quite extended scale, simply be- 
cause, from accidental causes, the service which the 
owner is in position to render the lessee varies 
greatly ; the rent of mines and of oil lands presents 
no new principle ; the right to rent stands on ground 
as unassailable as the right to wages and to profits ; 
rent partakes of the nature of both these two ; and 
varies, just as they do, under the action of supply 
and demand. 

5th. That division of land is best for purposes of 



ON LAND. 161 

production, which gives farms approximately equal in 
size to the cultivators ; and the best tenure is the fee- 
simple. 

Taking the last part of the proposition first, the 
fee-simple is better for production than any other 
tenure, because when one owns the land he tills, he 
takes a greater interest in it, it is his own, he has a 
constant motive to improve it, to make the produc- 
tion from it as great as possible, since all it pro- 
duces is his own. If men work from motives, and 
if the energy and persistence of the work be propor- 
tioned to the constancy and press of the motives, 
then will the fee-simple most certainly make the 
aggregate of produce greater than any other tenure 
of land. Moreover the fee-simple immeasurably 
improves the character of the cultivators. The 
masses of men are educated and developed by 
nothing so much as by the ownership of land. It 
tends to make them industrious, thrifty, indepen- 
dent, hopeful of the future, anxious to give their 
children better privileges, as well as better lands, 
than they themselves had. The testimony on this 
point is abundant from many countries, and it all 
goes to show that the peasant proprietor is a hap- 
pier and more virtuous, as well as a more industri- 
ous and productive man, than the mere tenant and 
farm-laborer; while similar testimony, as well as 
common observation, proves, that lands under the 
copyhold tenure, or leased at will, are far infe- 
rior in point of improvements and production, to 
contiguous lands held in fee-simple. The zeal of 
absolute ownership, especially if it be a limited 

ownership, has been observed to produce almost 
11 



162 ELEMENTS OF POLITICAL ECONOMY. 

magical effects, as well upon character as upon 
lands, transforming after a while the poorest into 
excellent lands, and thriftless and desponding labor- 
ers into frugal and enterprising proprietors. 

The practical play of the fee-simple draws after 
it such a division of lands into farms moderately- 
large and approximately equal, as can be shown to 
be most favorable to the largest aggregate produc- 
tion. Wherever there is no primogeniture and no 
entails, and owners can consequently sell a part or 
all their lands, whenever it is their interest to do so, 
lands naturally fall into those hands which are most 
capable of using them productively, because such 
persons can afford to pay more for them than any- 
body else; and the division that follows this impulse 
of self-interest and this freedom of exchange is 
likely to be into farms tolerably equal in extent and 
moderately large. Such a division has naturally 
taken place in New England, in the Middle States, 
and at the West ; while in the South, the institution 
of slavery led to the system of large plantations 
and few land-owners, which system, I believe, will 
now, under the auspices of freedom, give way to the 
better system of small farms and numerous proprie- 
tors. That the latter system is more profitable in 
reference to production, as well as advantageous in 
point of national character and a broadly based and 
sound development of the national resources, is evi- 
dent from a few considerations, and has been exem- 
plified distinctly in the diverse experience in this 
respect of France and England. 1. When the 
mass of the agricultural population are owners of 
the soil they till, the motives to productive culti- 



ON LAND. 163 

vation are brought to bear most universally. These 
motives are interest and hope. There is a high 
pleasure in possession, and in self-guided exertion, 
a strong stimulus to get as much as possible from 
the land, and at the same time to keep good and 
ever improve its condition. When the great body 
of the land of any country comes under the action 
of such motives as these, then will the amount of 
production be the greatest. 2. Dr. Franklin used to 
say that the best manure for the land was the foot 
of the owner ; and wherever the system of small 
farms prevails, there will be the most of what is 
so essential to successful farming, the personal su- 
pervision a -d exertion of the owners. Personal 
supervision '"to be most effective, must be limited in 
its sphere ; "^and the best agricultural knowledge and 
sldll becomes comparatively weak when it attempts 
to exhibit itself on too broad a surface. Because a 
man can cultivate one hundred acres better than any 
of his neighbors, it does not prove that he will cul- 
tivate fifty acres additional to them better than a 
neighbor of inferior skill, who is the owner of those 
fifty and no more. 3. The possession of small free- 
holds educates and gives energy to the masses. 
That educates a man which calls forth varied efforts 
of intelligence and will. To protect and advance 
his own interests, to attend upon the seasons, to 
watch and wait, to foresee and plan and labor, all 
this will secure that a nation of freeholders will 
never be a nation of ignorant, indolent barbarians. 
4. National strength is best secured and main- 
tained wherever there is a broad basis of indepen- 
dent yeomanry to lean back upon when heavy taxes 



164 ELEMENTS OF POLITICAL ECONOMY. 

are to be raised and strong blows of battle are to be 
struck in behalf of the nation. 

France and England are instructive examples in 
this whole matter. In France, since the abolition 
of all entails and primogenital rights by the revolu- 
tion of 1789, and under the action of the law requir- 
ing the equal partition of a man's landed estate 
among his children, the lands have become subdi- 
vided into small parcels, averaging perhaps from ten 
to thirty acres, and out of a population of about 
37,000,000, nearly 6,000,000 are proprietors of land, 
either in town or country. Undoubtedly more than 
half of the total population of France belong to 
families which own some portion of the soil. As we 
should expect from the considerations ahiiady urged, 
the results of this division have been most happy in 
all respects ; in point of the increase of agricultural 
products, the statistics sliow an annual average in- 
crease, from 1813 to 1840, of 1,000,000 francs ; in 
point of an industrious, frugal, cheerful peasantry;, 
in point of a very general desire and ability to pur- 
chase land ; in point of showing that subdivision 
ceases as soon as the lands, if divided further, would 
be less profitable in production ; in point of pauper- 
ism ; in point of national strength and weight, in 
spite of a centralized and repressive government; the 
results of such division of the lands have been such 
as we should expect, and such as M'e should wish. In 
England, on the other hand, the monster-farm system 
prevails, the small proprietors have mostly disappeared, 
the law of entails and leases ties up the landed estates 
from sale and division, about 2000 persons own one 
third of all the lands in England, Scotland, and Ire- 



, ON LAND. 165 

land, five noblemen own about one fourth of all 
Scotland, and the total number of all proprietors of 
land in the three kingdoms will not reach 50,000, in 
a population of 28,000,000. The results are seen, 
in part, in what has been justly called the irretrievable 
helotism of the laboring classes ; in an annual poor 
rate, raised by taxation, of over $42,000,000 ; in un- 
measured inequality in fortunes and comforts; in 
the lack, felt alike in war arid peace, of a large class 
of sturdy yeomanry, the strength of a State ; and in 
a consequent sinking of relative position, power and 
influence, former times being held up with the pres- 
ent, as compared with France and the other first- 
class powers. No degree of merit in the other parts 
of the English system, can ever compensate the 
want of just and broadly liberal laws of land. 



166 ELEMENTS OF POLITICAL ECONOMY. 



CHAPTER IX. 

ON COST OF PRODUCTION. 

We are now in position to be able to analyze the 
cost of production, and to bring forward some sup- 
plementary matters relating to value, which could 
not be properly discussed, until the subjects of labor, 
capital, and land, were, at least in their ground prin- 
ciples, understood. While we were inquiring, in the 
chapter on value, whether such a thing as a measure 
of value were possible, it was remarked that some 
political economists have thought that the cost of 
production of any commodity is the most accurate 
measure of its general purchasing-power; and it 
might have been added, that these writers consider 
that there is such a thing as natural value distinct 
from market value, that natural value is the cost of 
production, and that market value oscillates perpetu- 
ally around that, and tends constantly to return to it. 
How far these views are just, how far cost of pro- 
duction constitutes a law of value within the all- 
comprehending law of demand and supply, is the 
point to which attention is now directed. 

It is noticeable, that while almost all people put 
forth onerous efforts to satisfy the present and imme- 
diately prospective wants of other people, in view of 
receiving back from them corresponding efforts to 
satisfy their own present and immediately prospec- 



ON COST OF PRODUCTION. 167 

tive wants, there are some people, who have both 
foresight and capital, who set to work to make 
preparations in reference to services which they ex- 
pect to render some time in the future ; and it is 
evident that this matter of the cost of production 
has an especial bearing upon those classes of pro- 
duction in which permanent investments are made, 
looking to future rather than to present exchanges. 
It becomes necessary to attend to cost of production 
simply because cost of production is sometimes an 
exact measure of one of the elements out of which 
value springs, namely, the element of effort. When 
a surgeon, for example, charges fifty dollars for cut- 
ting off a man's leg, cost of production is an imper- 
tinent phrase in relation to such a service, and is no 
measure of the effort ; but when a capitalist invests 
$20,000 in a cutlery establishment, hires all his 
labor, and at the end of the year has produced 5000 
knives, cost of production has a definite meaning as 
applied to each one of the knives, and is an accu- 
rate measure of the one element of effort, which 
goes, together with other elements, to determine its 
value. It is not true at all that cost of production 
alone determines the value of the knife, or is a meas- 
ure of the value of the knife, but it is true that, in 
this case, and in all cases in which a commodity is 
produced by a definite capital invested for a fixed 
time, and by labor wholly hired, or estimated as 
hired, the cost of production is an exact measure of 
one of the four elements which go to determine 
value, namely, of one effort. Now let us suppose 
that when these knives are exposed for sale, no such 
return efforts are offered for them as are estimated 



168 ELEMENTS OF POLITICAL ECONOMY. 

by the maker as compensatory and remunerative. 
He may, in order to avoid a still greater loss, sell 
his knives below the cost of their production, but it 
is evident that he will not go forward at present in 
his enterprise of making knives. He will suspend 
operations, or withdraw from the business ; and his 
action in this respect will affect the supply of knives 
to lessen it ; and the next equalization of demand 
and supply will be likely to adjust a market value 
more favorable to knife-makers. Or if, when the 
knives are exposed for sale, they meet with an ex- 
change at very remunerative rates, our capitalist is 
now stimulated to increase his production, to put back 
his profits into his business, and perhaps to invest in 
it additional principal. His action in this respect will 
affect the supply of knives to increase it ; and the 
next equalization of demand and supply, or if not 
the next, some subsequent one, will be likely to ad- 
just a new market value less favorable to knife- 
makers. Thus it is seen, that absolute cost of 
production influences value not directly, but re- 
motely, through its influence on supply. To sup- 
pose and to say that the cost of production of one 
commodity determines its value in an exchange with 
another, is to perpetuate the old mistake of ignoring 
the second commodity, is to reiterate the fallacy that 
value is an independent quality of one thing, is to 
confuse the whole subject of value. When the 
writers referred to speak of the " natural value " 
of any commodity, they mean its absolute cost of 
production ; but, at this stage of our inquiry, it 
surely cannot be necessary to repeat the thought 
already so often expressed in substance, that an 



ON COST OF PRODUCTION. 169 

analysis of one component part falls far short of de- 
termining the resultant of four component parts. I 
do not think the expression " natural value " is cal- 
culated to be useful. From the very meaning of the 
word " value," if it is to have any consistent mean- 
ing at all, there can be no other kind of value than 
market value, that is, value in exchange. 

But while all this will doubtless be conceded to 
be just, there are other points' of view in which the 
cost of production of any commodity comes to be a 
very important matter. From its obvious relations to 
supply, already exemplified, it is constantly, though 
indirectly, influencing the value of the commodity 
itself; and in respect to permanent investments, 
looking solely to future production, it becomes the 
main inquiry; because, while the cost of production 
can never determine the purchasing-power of the 
product, it is always one element in determining it; 
and also, especially, because the improvements which 
are all the time being introduced into the mechani- 
cal and other processes of such production, which 
improvements ahvays tend to lessen the cost of the 
product, have the effect to lessen the value of all 
permanent investments, unless similar improvements 
be inaugurated in connection with them. The march 
of improvement is so constant, that old machinery 
and old processes are rapidly depreciated ; and a 
calculated cost of future production in one establish- 
ment is almost sure to be disturbed by new labor- 
saving inventions in other similar establishments, 
which will be able in consequence to offer the com- 
modity at a lower rate than the rate estimated; 
in which case the value of the product will not con- 



170 ELEMENTS OF POLITICAL ECONOMY. 

form to the estimated or even actual cost of produc- 
tion in that establishment, but will pitilessly fall to 
the point at which similar commodities are offered 
by the more fortunate producers. For these reasons 
we must inquire carefully after the elements of cost 
of production. 

These elements are two : cost of labor, and cost 
of capital. These are the only onerous elements 
that enter into production. Assisting the processes 
are, indeed, the natural powers of land, water, wind, 
steam, electricity, and so on, but as these are always 
gratuitous, they form no element of cost. Labor 
must have its wages, and capital must have its 
profits, and also a sinking-fund from which to 
replace the original capital when worn out or ex- 
pended. It will be in vain to search for any other 
ingredient of cost than these two. 

1. By cost of labor is meant, of course, its cost 
to the employer, and not to the laborer himself, 
in reference to whom the phrase would have no 
definite meaning. Now, if we make an exhaustive 
analysis of the cost of labor to the employer, we 
shall find that there are three things, and only three 
things, that go to determine its cost. 1. Efficiency 
of the labor. 2. The rate of nominal wages paid. 
3. The cost of that in which the wages are paid. 
To illustrate each of these in order: — If a capitalist 
hires two men to work for him at the same rate of 
wages, and if the one is twice as efficient a laborer 
as the other, the cost of his labor to the capitalist is 
one half less than the cost of the other's labor. The 
first element of the cost of labor is its efficiency. If 
a capitalist, accustomed to pay one dollar a day, is 



ON COST OF PRODUCTION. 171 

now obliged to pay one dollar and a half a day to 
his laborers, their efficiency remaining the same, the 
cost of labor to him is just one half increased. The 
second element is nominal wages. If that com- 
modity, whether money or other, in which wages 
are paid, varies in cost to the capitalist, the cost of 
the labor compensated by that commodity, nominal 
wages and efficiency remaining the same, is varied 
thereby of course. We shall discover in the next 
chapter that the value of money is by no means 
invariable, as we have already learned the variable 
nature of all other values, and accordingly the third 
element of cost of labor is the cost of that in which 
the labor is paid. It is easy to see that there is 
nothing else, aside from these three things, that can 
ever affect the cost of labor. This analysis is not 
given here for its own sake merely, but for some 
ulterior purposes, of which the ffi-st is to show, how 
various are the ingredients that enter into the com- 
putation which men ought rationally to make before 
engaging in extended enterprises of production. 
They must make calculations on the prospective 
cost of production, since that is one element that 
will determine the value of their future product. In 
doing this they must calculate the cost of labor, and 
the cost of capital; and the cost of labor alone 
involves, as we have just seen, three variables, no 
one of which can be safely neglected in the sup- 
posed estimation. 

The second purpose is to explain from the analy- 
sis, that a great diversity of nominal wages may 
exist in different countries without necessarily affect- 
ing the cost of labor. If English wages, for exam- 



172 ELEMENTS OF POLITICAL ECONOMY. 

pie, are, nominally, one half wages in the United 
States, it is very poor logic to jump to the conclu- 
sion, that the cost of labor in England is one half 
less than in the United States. That will depend 
partly on the efficiency of the labor, and partly on 
the cost of that in which the respective labor is paid. 
If English laborers are only one half as efficient as 
American laborers, then a difference of one half in 
nominal wages, cost of money in the two countries 
being the same, will occasion no difference at all 
in cost of labor. Because nominal wages in Eng- 
land are lower than with us, many people think and 
maintain, that the English have an advantage over 
us, whereas it is notorious, and admitted even by 
themselves, that American labor is more efficient 
than English labor, and therefore there is no such 
difference in cost of labor as the difference in nom- 
inal wages would indicate, even if there be any 
difference in cost of labor at all. Just at this point 
great confusion has existed in the popular mind, and 
some by no means harmless fallacies are still current, 
arising from the want of a due analysis of the cost 
of labor. It is probable, all the elements being 
allowed for, that the cost of labor in one country is 
not very widely different from its cost in other coun- 
tries ; because, if there were much difference, there 
would be a greater difference than is actually ob- 
served in the rate per cent, of capital; and this con- 
clusion is strengthened, when it is remembered, that 
in those countries in which the cost of labor is sup- 
posed to be low, as in England, the rate per cent, of 
capital is also low; and in those countries, as the 
United States, in which the cost of labor is sup- 



ox COST OF PKODUCTIOX. 173 

posed to be high, the rate per cent, is also high. 
Before leaving this point, I wish to remove one or 
two causes of misapprehension, which have fre- 
quently infected discussions of wages. The terras 
"high and low wages," are often used ambiguously; 
some meaning by the words, a high or low nominal 
rate; others, a high or low degree of comforts en- 
joyed by the laborers, as the fruit of their wages ; 
others, still, as Ricardo, using the words high and 
low in relation only to profits, in which last sense, 
if wages are high, profits are low, and conversely. 
In the first two senses, wages and profits may both 
be high, or both be low, at the same time and place, 
but not in the last sense. When the first sense is 
meant, the expression should be money ivages; when 
the second, real ivages; when the third, reiative 
wages. Had this nomenclature been adopted and 
consistently employed, many an angry dispute and 
many a false conclusion would have been avoided. 
Also, it has been thought by some, that high money 
wages create high prices of commodities, that is to 
say, that things are dear because laborers have been 
paid a high price for their agency in producing them. 
This does not follow. Their labor may be very 
efficient, and may be assisted by first-rate machinery, 
and the price of the^ commodities may be low, 
although the money wages may be high. Money 
wages must not be confounded with cost of labor, 
because it is only one element of cost of labor. A 
higher cost of labor in any department of produc- 
tion, other things being equal, will tend to raise the 
price of the product, but not higher money wages 
alone. Price is value expressed in money, and ^en.- 



174 ELEMENTS OF POLITICAL ECONOMY. 

eral rise or fall of prices is usually due to changes 
in the currency. An inflated currency produces 
universally high prices, as well of labor as of com- 
modities, and for the same reason of labor as of 
commodities, and it is a superficial view which 
supposes, that, of these two effects of a common 
cause, one is a cause of the other. On the other 
hand it is sometimes supposed, that the exact re- 
verse of this takes place, and that money wages 
become high simply because the commodities which 
the laborers consume have become high. This is 
an error similar to the other. If an inflation of the 
volume of the current money of the country has 
supervened, then the price of labor rises by the same 
impulse that carries up the price of commodities. 
Both are effects ; neither is the cause of the other. 
But if the currency has remained sound and stable, 
a high price of any of the commodities consumed 
by the laborers, has no tendency, that I can perceive, 
to raise the rate of money wages. The higher 
price of those commodities may have arisen from 
deficient harvests, or from a higher cost of labor in 
those departments, from inequality of taxation, or 
other similar causes ; but no one of these enables 
capital to share the gross proceeds of production on 
better terms with labor. Neither money, nor real, 
nor relative wages can rise, as I see, merely from 
high prices of the commodities which the laborers 
consume. It seems to me, accordingly, that much 
clear light is thrown from this analysis of the cost of 
labor upon the whole vexed question of wages. 

The third ulterior purpose of presenting this an- 
alysis is briefly to unfold the principles according to 



ON COST OF PKODUCTION. 175 

which the division between wages and profits is 
practically made. It was Mr. DeQuincy who first 
called profits the leavings of wages ; but this is only 
true when by wages is meant the cost of labor. The 
gross products created by the combined action of 
capital and labor belong in common to the capital- 
ists and laborers, and are to be divided between them 
in some way, and the analysis in question enables 
us to perceive just how they are divided. Cost of 
labor being deducted, the rest goes to capital as a 
matter of course, and the proportion of this part to 
the whole capital determines the rate per cent, of 
profit. If this part falling to capital is large for 
every hundred invested, the rate per cent, is high ; if 
small, low. The efficiency of labor and the state of 
the currency being as before, a rise of money^ wages 
will lessen profits, but no rise of money wages ac- 
companying increased efficiency of labor, or result- 
ing from inflated currency, has a tendency to lessen 
profits at all. The capitalist as such is interested in 
having cost of labor low, but not in low money 
wages necessarily, because a low cost of labor is 
consistent with high money wages, and with high 
real wages too. Very efficient labor may be very 
highly paid, and yet leave to capital a high rate per 
cent. We here see again from another stand-point, 
and from a deeper view, a truth we have seen before, 
that there is no real antagonism but a real harmony 
of interests between capitalists and laborers. Both 
are alike interested in the combined efficiency of 
capital and labor, that is to say, in the amount of 
gross products created ; and, in respect to the divis- 
ion of this gross amount, there is no more collision 



176 ELEMENTS OF POLITICAL ECONOMY. 

of interest than in making the dividends of the year 
among the partners of a commercial house. The 
cost of labor must first be defrayed ; and this de- 
pends on its efficiency, its nominal rate of remunera- 
tion, and the present purchasing-power of money. 
What is left is gross profits, and the relation that 
this bears to the whole capital invested decides the 
rate per cent. So far of cost of labor. 

2. The second element in the cost of production 
is the cost of capital ; and this also must be analyzed 
into three variables, no one of which can be safely 
neglected in a computation which has for its object to 
decide a prospective cost of production: — 1st, The 
rate per cent. ; 2d, The time for which the capital is 
advanced ; 3d, The form of the capital as liable to 
slow or rapid deterioration. We must look at the 
influence 'of each of these elements on cost of pro- 
duction. 

(1.) Let us suppose that the rate p^^r cent, at Am- 
sterdam. is 3, and the rate at New York is 7, that 
the cost of labor is equal in the two cities, that the 
time of advance is one year, and that there is no 
liability of the capital to wear out ; a commodity 
made at Amsterdam with an outlay of $100 can be 
sold for $103, while the same commodity made at 
New York with the same outlay cannot be sold for 
less than $107. The current rate per cent, is one 
element of the cost of capital, and through this, of 
the cost of production. 

(2.) The effect of the time of advance on cost of 
capital is more striking. Let the same supposition 
be continued, except that the time of advance in 
New York be extended to four years. The com- 



ON COST OF PRODUCTION. 177 

modity will sell in Amsterdam, as before, at $103, 
but in New York for not less than $131. This 
principle is well illustrated also in the case of wine, 
which to reach its perfection requires to be kept a 
number of years. Even under the same rate per 
cent, which we will suppose 6, a commodity made 
in six months with an outlay of $100 may sell for 
$103; while wine grown in the same six months 
at the same outlay, kept five years, cannot be sold 
without loss for less than $133. If the period of 
advance be long, and the rate per cent, be high, the 
cost of capital from the two causes enhances enor- 
mously the cost of the product ; so that, it is only 
countries like England and Holland, in which the 
rate, per cent, is very low, which can successfully 
engage in enterprises requiring a large capital to be 
invested for long periods before returns are realized. 
This accounts for the fact that mining operations in 
Mexico and South America have been largely carried 
on by foreign rather than American capital. One 
million of Dutch capital at three per cent., expecting 
to realize returns only after twenty years, will be 
remunerated by a product selling for $1,806,111; but 
under like circumstances, American capital at seven 
per cent, must have a return of $3,869,685, or lose. 

(3.) Most forms of capital, especially that invested 
in buildings, machinery, and the like, more or less 
rapidly wear out, and a sinking-fund must be re- 
served from gross profits in order to replace the prin- 
cipal. This is the third element in cost of capital, 
and through this cost, influences the cost of produc- 
tion, and through cost of production, affects, in the 
manner already pointed out, the value of the prod- 

12 



178 ELEMENTS OF POLITICAL ECONOMY. 

uct. Suppose there are two commodities A and B 
produced in two establishments, in each of which is 
invested a capital of $11,000, in one of which is a 
machine costing $1000, which is wholly worn out by 
one year's use, and in the other a machine costing 
the same sum, which will last however for ten years. 
Let the rate per cent, be ten, and the time consumed 
in completing the products be one year. There is a 
difference in the cost of capital in the two establish- 
ments, and this difference indirectly but immediately 
appears in the value of the respective products. To 
A must be charged not only $1100, the interest on 
the capital at the current rate, but also another 
flOOO, wherewith to replace the machine already 
worn out by the year's production. A cannot be 
sold without loss for less than $2100. B however 
will cost less. To it must be charged, as before, 
$1100, current rate of profit on the capital invested, 
and only $100 to replace after ten years' use the 
machine. B therefore can permanently sell without 
loss for $1200. 

Now, then, if my readers are willing to follow me 
a little further along this dry and dusty road, we 
shall be able to draw some important conclusions in 
respect to value as depending on wages and profits. 
While we have been seeming to attend to only one 
of the four elements out of which value springs, 
namely, one effort, of which cost of production is 
always an exact measure whenever the effort is em- 
bodied in a commodity made jointly by paid labor 
and capital, we have really been attending to the 
other effort also whenever that effort is similarly 
embodied; and since gold and silver money is a 



ON COST OF PRODUCTION. 179 

commodity, like any other, we have incidentally, in 
this analysis of cost of production, taken some steps 
towards determining the value of money. Now, 
cost of production is made up of cost of labor and 
cost of capital, and the first general conclusion is, 
that if the cost of labor for any reason be enhanced, 
nothing can prevent this higher cost from taking 
effect and exhibiting itself in lower profits. The 
second conclusion is, that money-wages, or any rise 
or fall of them, provided they are uniform, or uni- 
formly rise and fall, in those departments of produc- 
tion whose commodities exchange with each other, 
have no effect at all upon value, since they are com- 
mon factors in two costs of production, and like all 
common factors, cancel each other; but any inequal- 
ity of money-wages in these departments that affects 
the cost of labor, will have an indirect but controlling 
influence on the value of the commodities. The 
same is true of profits. So far as the rate per cent, 
is common to all branches of production, the capital 
advanced for the same period, with a similar risk of 
deterioration or loss, and so far as any one or all of 
these advance or recede uniformly and together, they 
do not affect the value of any of the commodities 
produced. But inequality in any one of these points, 
varies the re.!ative cost of capital, and consequently, 
the cost of production, and consequently the value 
of the product. It is at this point precisely that 
there is opened up to us a clear view of the influence 
of machinery upon values. So far as machinery 
brings into play, as it always does, a gratuitous 
natural force, it is outside the pale of value ; but 
since the machinery itself is one important form of 



180 ELEMENTS OF POLITICAL ECONOMY. 

capital on which rate per cent, must be paid, the 
more machinery employed relatively to labor in the 
production of commodities, the more do profits enter 
into the cost of production, and the more powerfully 
do changes in the rate per cent., in the time of ad- 
vance, and in the risk of deterioration, tell upon the 
value of commodities so produced, as estimated in 
other commodities. This whole matter is exceed- 
ingly well put by Mr. Mill in the fourth chapter of 
his third book, and I shall here enrich my own pages 
by transcribing two or three paragraphs from his. 

" All commodities made hj machinery are assimilated, at least 
approximatively, to the wine in the preceding example. In com- 
parison with things made wholly by immediate labor, profits enter 
more largely into their cost of production. Suppose two com- 
modities A and B, each requiring a year for its production, by 
means of a capital, which we will on this occasion denote by 
money, and suppose to be £1000. A is made wholly by immedi- 
ate labor, the whole £1000 being expended directly in wages. 
B is made by means of labor which cost £500, and a machine 
which cost £500, and the machine is worn out by one year's use. 
The two commodities will be of exactly of the same value; i which, 
if computed in money, and if profits are twenty per cent, per 
annum, will be £1200. But of this £1200, in the case of A, 
only £200, or one sixth, is profit ; while in the case of B there is 
not only the £200, but as much of £500, (the price of the ma- 
chine,) as consisted of the profits of the machine-maker ; which, 
if we suppose the machine also to have taken a year for its pro- 
duction, is again one sixth. So that in the case of A only one 
sixth of the entire return is profit, whilst in B the element of 
profit is not only a sixth of the whole, but an additional sixth of a 
large part. 

" The greater the proportion of the whole capital which con- 
sists of machinery, or buildings, or material, or anything else 

1 Better ; the two commodities have exactly the same cost of produc- 
tion. 



ON COST OF PRODUCTION. 181 

wbich must be provided before tlie immediate labor can commence, 
the more largely will profits enter into cost of production. It is 
equally true, though not so obvious at first sight, that greater 
durability in the portion of capital which consists of machinery or 
buildings, has precisely the same effect as a greater amount of it. 
As we have just supposed one extreme case, that of a machine 
wholly worn out by a year's use, let us now suppose the opposite 
and still more extreme case, of a machine which lasts forever, and 
requires no repairs. In this case, which is as well suited for the 
purpose of an illustration as if it were a possible one, it will be 
unnecessary that the manufacturer should ever be repaid the £500 
which he gave for the machine, since he has always the machine 
itself worth £500 ; but he must be paid as before a profit on it. 
The commodity B therefore, which in the case previously supposed 
was sold for £1200, of which sum £1000 were to replace the 
capital, and £200 were profit, can now be sold for £700, being 
£500 to replace wages, and £200 profit on the entire capital. 
Profit, therefore, enters into the value of B in the ratio of £200 
out of £700, being two sevenths of the whole, or 28^ per cent., 
while In the case of A, as before, it enters only in the ratio of one 
sixth, or 1 6| per cent. The case is of course purely ideal, since 
no machinery or other fixed capital lasts forever ; but the more 
durable it is, the nearer it appi-oaches this ideal case, and the more 
largely docs profit enter into the return. If for instance, a ma- 
chine worth £500 loses one fifth of its value by one year's use, 
£100 must be added to the return to make up this loss, and the 
price of the commodity will be £800. Profit, therefore, will enter 
into it in the ratio of £200 to £800, or one fourth, which is still a 
much higher proportion than one sixth, or £200 to £1200, as in 
case of A. 

" From the unequal proportion in which in different employ- 
ments profits enter into the advances of the capitalist, and there- 
fore into the returns required by him, two consequences follow 
in regard to value. One is, that commodities do not exchange 
in the ratio simply of the quantities of labor required to produce 
them, not even if we allow for the unequal rates at which differ- 
ent kinds of labor are permanently remunerated. Suppose as be- 
fore an article. A made by £1000 worth of immediate labor. But 
instead of B made by £500 worth of immediate labor, and a ma- 
chine worth £500, let us suppose C, made by £500 worth of imme- 



182 ELEMENTS OF POLITICAL ECONOMY. 

diate labor by the aid of a machine which has been produced by 
another £500 worth of immediate labor ; the machine requiring a 
year for making, and worn out by a year's use ; profits being as 
before twenty per cent. A and C are made by equal quantities 
of labor, paid at the same rate; A costs £1000 worth of direct 
labor ; C only £500 worth, which however is made up to £1000 
by the labor expended in the construction of the machine. If 
labor, or its remuneration, were the sole ingredient of cost of 
production, these two things would exchange for one another. 
But will they do so ? Certainly not. The machine having been 
made in a year by an outlay of £500, and profits being at twenty 
per cent., the natural price of the machine is £600; making an 
additional £l00, which must be advanced over and above his 
other expenses, by the manufacturer of C, and repaid to him with 
a profit of twenty per cent. While therefore the commodity A 
is sold for £1200, C cannot be permanently sold for less than 
£1320. 

" A second consequence is that every rise or fall of general 
profits will have an effect on values. Not indeed by raising or 
lowering them generally, (which is a contradiction and impossi- 
bility,) but by altering the proportion in which the values of things 
are affected by the unequal lengths of time for which profit is due. 
Wh6n two things, though made by equal labor, are of unequal 
value because the one is called upon to yield profit for a greater 
number of years or months than the other, this difference of value 
will be greater when profits are greater, and less when they are 
less. The wine which has to yield five years' profit more than the 
cloth, will surpass it in value, and much more if profits are forty 
per cent., than if they were only twenty. The commodities A 
and C, which, though made by equal quantities of labor, were sold 
for £1200 and £1320, a difference of ten per cent., would, if 
profits had been only half as much, have been sold for £1100 and 
£1155, a difference of only five per cent. It follows from this 
that even a general rise of wages, when it involves a real increase 
in the cost of labor, does in some degree influence values. It does 
not aflfect them in the manner vulgarly supposed, by raising them 
universally. But an increase of the cost of labor lowers profits ; 
and, therefore, lowers in natural value the things into which 
profits enter in a greater proportion than the average, and raises 
those into which thfey enter in a less proportion than the average. 



ON COST OF TKODUCTION. 183 

All commodities in the production of which machinery bears a 
large part, especially if" the machinery is very durable, are lowered 
in their relative value when profits fall; or, what is equiveilent, 
other things are raised in value relatively to them." 

In other words, the more, or the more durable the 
machinery in the production of a commodity, the 
larger the element of profit in the price now abso- 
lutely reduced ; on a rise of the rate per cent, there- 
fore, the value of the commodity made by more or 
more durable machinery will relatively rise. 

Having traced completely the influence of ma- 
chinery on profits, a few things must now be said on 
its influence upon wages. Formerly the prejudice 
was almost universal, and is still wide-spread in 
many parts of the world, that the general introduc- 
tion of labor-saving appliances does an injury to the 
laborers by taking away their work. So strongly 
has this been felt by tke laborers, that in England, 
and especially in Ireland, mobs and riots have usu- 
ally accompanied the introduction of machinery into 
those departments of production in which hand-work 
had previously prevailed. If luork were what labor- 
ers really wanted, the prejudice in question would 
cease to be such, and become a sound opinion; since 
the only object and result of introducing machinery 
is to lessen work, at least with reference to a given 
product ; and the laborers, to be consistent, should 
not stop with opposing new inventions, but should 
destroy all forms of existing capital, that there might 
be work a plenty for simple human hands. What 
the laborers really want, however, is not work, but 
wages, or rather, those commodities for which their 
wages are expended ; and the question is, whether 



184 ELEMENTS OF POLITICAL ECONOMY. 

labor-saving processes tend to lessen, not work, but 
work's remuneration. There is no form of proof 
that I know of, which amounts to a moral demonstra- 
tion that the substitution of machinery for labor can- 
not lessen the laborer's wages; the opposite has per- 
haps sometimes happened, and is possibly liable to 
happen, especially in agriculture, in certain transitory 
states of society. But the general appeal can be 
made to experience with all safety. As a matter of 
fact and experience, it has not been found true that 
the introduction of improved processes, the substitu- 
tion of Nature's forces for human muscle, has deteri- 
orated the condition of laborers in those departments 
into which the inventions have been brought, or the 
condition of laborers generally. Exactly the reverse 
has usually taken place ; and wages are apt to be 
highest rather than lowest in connection with the 
most and the most durable machinery, and higher 
rather than lower, after the introduction of more and 
better machinery. Operatives in manufactories, for 
instance, are, as a rule, better paid than farm labor- 
ers ; and better paid in the first class than in the 
inferior establishments. Teamsters, in this country 
at least, and I suspect in all countries, are as well to 
do as before the construction of railroads. So of 
spinners, weavers, and artisans of every name. In 
explanation of these general facts, it may be noticed, 
(1) that labor is always required in the construction 
and repairs of all kinds of labor-saving appliances, 
and so far forth, a new market for labor is opened 
up in place of any loss of market possibly resulting 
from their introduction ; (2) these forms of capital 
always tend to cheapen the products which they 



ON COST OF PRODUCTION. 185 

help to create, and such products because they are 
cheap find a wider circle of consumers, and more 
must be produced to supply a now broader market, 
and so far forth the demand for labor may be strong- 
er than it was before ; (3) These improvements 
cheapen also the commodities consumed by the 
laborers themselves, and therefore a given rate of 
wages now secures for them a higher grade of com- 
forts. Combining these observations with the law 
of distribution already pointed out, and the conclu- 
sion is fairly established that the effect of machinery 
is, and will be, rather favorable than otherwise to 
the laboring classes. 

Now, as a result of this entire discussion, atten- 
tion must be called to a generalization, which has 
been more or less fully noticed by several writers, 
and with the presentation of which, this branch of 
the subject will be concluded. Since, by the aid of 
the different forms of capital, and such a division of 
labor as that every part of it is made most efficient, 
the cost of production of most kinds of manufac- 
tured articles tends to decline as compared with the 
cost of production of food and raw materials, in 
whose production these advantages are less perfectly 
attainable, there is a constant tendency towards 
approximation in the value, and, if money remain 
unchanged, in the price, of raw materials and of 
finished products ; and in the degree of this approx- 
imation will be found a gauge of the success with 
which gratuitous natural forces and improved facili- 
ties of art have been made available in production. 
This single statement, clearly perceived in its 
grounds, grasps and holds the principal results of 



186 ELEMENTS OF POLITICAL ECONOMY. 

our discussions thus far. Examples of the principle 
offer themselves on every hand. Let us look at 
cotton cloth ; an example somewhat marred at the 
present moment by the consequences of the existing 
-war, and disguised by a depreciated currency; but 
which, allowance being made for these, is an excel- 
lent illustration. At the opening of this century, 
the average price of raw cotton was just about 
twenty cents a pound ; at the middle of the century, 
and onwards, the average price was just about ten 
cents a pound. At the first period, although accu- 
rate tables are wanting, the average price of cotton 
cloth could not have been less than sixty cents a 
yard ; at the second period, it could hardly have been 
more than ten cents a yard. The absolute price of 
raw cotton diminished in the interval in the ratio of 
2 to 1 ; while the absolute price of cotton cloth 
diminished in the interval in the ratio of 6 to 1. 
Relatively to a yard of finished cloth, the raw mate- 
rial greatly rose in value, since at the first it took 
three pounds to bu}?" a yard, and at the last but one 
pound. There was a marked approximation all the 
while of the price of the finished product towards 
the price of the raw material ; in other words, less 
and less difference of price was due to the cost of 
manufacture, which lessening cost marks the ever- 
increasing efficiency in the production of commodi- 
ties of the gratuitous powers of Nature applied 
through machinery. According to Dr. Ure, the in- 
troduction of machinery into the manufacture of 
lace, lessened the cost of that product in the ratio of 
50 to 1 ; and thereby, and to that degree, approxi- 
mated the price of a pound of such lace towards the 



ON COST OF PRODUCTION. 187 

price of a pound of the cotton from which it was 
made. Food, raw materials, and labor, and the last 
more than the other two, tend steadily to advance in 
their power to command, that is, to buy, most kinds 
of finished products; and therefore, the millions who 
labor with their hands, and the other millions who 
own the soil and till it, have already advanced, and 
will still more advance, in a scale of comforts, with 
the advancing centuries. 



188 ELEJIENTS OF POLITICAL ECONOMY. 



CHAPTER X. 

ON MONET. 

There is no use in saying that money is such a 
mysterious and complicated agent that nobody can 
understand it. That is the language of indolence. 
Money is wholly a matter of man's device ; it was 
invented, just as any other instrument is invented, 
to accomplish a certain purpose; and it would be 
strange if men cannot comprehend what men them- 
selves have devised. In all departments of God's 
works, indeed, we constantly meet with what can- 
not be fully comprehended nor perfectly fathomed, 
because an infinite mind has been there at work 
upon an infinite plan. But there is no such profun- 
dity in the works of men ; unfathomableness is not 
an attribute of human skill ; and since money is an 
instrument devised by men to aid them in accom- 
plishing a certain purpose, it is as unreasonable to 
pretend that it is incomprehensible, as it would be 
to pretend that the steam-engine is incomprehen-- 
sible. I hold it for certain that whatever men have 
devised, men can comprehend. 

The general purposes which money was designed 
to answer, and which it is found admirably to fulfil, 
are best perceived under the supposition that there 
were no money. Exchanges begun, and were profit- 
able, long before money came into existence. Men 



ON MONEY. 189 

first exchanged services directly for each other, with- 
out the intervention of any medium. This form of 
trade is called Barter. Hiram, king of Tyre, fur- 
nished to Solomon a certain quantity of cedars from 
Lebanon, and Solomon, in return, furnished the Tyr- 
ians a certain quantity of wheat and oil. This may 
serve as an instance of barter, although money had 
been in current use long previously to that transac- 
tion, as is seen in the purchase by Abraham of the 
cave and field of Machpelah, for which he weighed 
out four hundred shekels of silver, current money 
with the merchant. It is obvious, however, that 
while barter is a great deal better than no exchanges 
at all, there are inherent difficulties in that form of 
exchange. Under pure barter, exchanges are pretty 
much limited to those parties each of whom is in 
position to render to the other such services, and in 
such quantities, as the other stands in direct and im- 
mediate need of; it is not enough, under these con- 
ditions, that a man should have a service to sell, but 
also he must find a man who wants that specific 
service, and more than this, a man who not only 
wants that specific service, but also has a service to 
render in return, such as the first man wants. If A 
has wheat which he wishes to exchange for a coat, 
he must find a party who wants wheat, and who 
also is in position to render a coat in exchange for 
it, and moreover who wants just as much wheat as 
will pay for a coat, no more and no less ; if he wants 
more, he may have nothing to render in exchange for 
the excess which A is willing to accept ; if less, A 
may have nothing which the other wants, besides 
wheat with which to help pay for the coat. Even in 



190 ELEMENTS OF POLITICAL ECONOMY. 

the simpler states of society, the inconvenience, loss 
of time, and deterioration of commodities involved in 
direct barter, are very great, and in more advanced 
states of civilization would be intolerable, if it were 
possible, as it is not, for society to become advanced 
under those conditions. Exchanges are so limited 
in time, place, and variety, association is so ham- 
pered, and the development of all peculiar talents so 
impeded, under a system of simple barter, that one 
of the initial steps in the progress of all societies 
has been to hit upon some expedient to lessen 
these intrinsic difficulties ; and so to facilitate ex- 
changes. This expedient has been the invention 
of money, that is to say, the selection of some prod- 
uct, which, by general consent, instead of the par- 
ticular purchasing-power of common commodities, 
should have a universal purchasing-power ; so that, 
whenever anybody has anything to exchange, he 
may first exchange it for this product, whatever it 
be, and then with this product purchase at any time 
and place, whatever he may want. Money makes 
no alteration in any law of value, but merely sub- 
stitutes for convenience' sake in. every transaction 
in which it plays a part, a universal for a specific 
purchasing-power; a book, for example, has a specific 
purchasing-power; there is somebody who wants it, 
and is willing to give a sum of money for it ; and 
the owner by the sale of it parts with a product 
which has only the power to purchase something 
from a few persons, and receives a product which 
has the power to purchase something from all per- 
sons ; it is not true to say that the book is worth 
more than the money, or the money is worth more 



ON MONEY. 191 

than the book, because they are just worth each 
other, as is demonstrated by the sale ; but it is true 
to say that the seller of the book has substituted in 
the place of a limited purchasing-power, of which 
he was proprietor, a general purchasing-power, of 
which he has now become proprietor; and that the 
command of the money, which has no more value 
than the book had, does carry along with it a supe- 
rior command over purchasable articles generally. 
In one word, value in the form of money is in a 
more available shape for general purchasing, than 
value in any other form. This is the exact expression 
for what truth there is in the common vague remark, 
that money is different from all other commodities ; 
in point of value, it is different from other commodi- 
ties in just one respect, namely, while they have the 
power of buying some sorts of things from some per- 
sons, it has the power, derived from the usages of 
society, to buy all sorts of things from all persons. 

It might seem, at first sight, as if the introduction 
of money, instead of simplifying the operations of 
exchange, would only complicate them, since it 
necessitates two exchanges, where otherwise there 
would be but one ; but reflection, as well as experi- 
ence, is able to convince us that there is no machine 
which economizes labor like money ; no instrument 
which plays so important a part in production ; no 
invention, unless it be the invention of letters, which 
has contributed more to the civilization of mankind. 
While men still exchanged in kind, and knew no 
other mode, the purchasing-power of a service was 
very much confined in place, and would not be 
parted with except in view of the return service 



192 ELEMENTS OF POLITICAL ECONOMY. 

actually there present, the ultimate parties to an 
exchange must for the most part come together 
locally, in order to effect an exchange ; under a 
money system, this is no longer necessary, for it is 
sufficient to constitute a market for any commodity 
that it is wanted anywhere on the globe, the middle 
man, paying the seller for it in money, transports it 
thither, and receives back his money with a profit 
from the ultimate consumer. Thus money brings 
conveniently buyers and sellers together commer- 
cially, no matter how far separated locally. So, 
also, money generalizes any purchasing-power in 
point of time. The fruit-dealer, for example, must 
dispose of his product quickly, or it perishes on his 
hands, but by transmuting his perishable product 
ifito money, he may keep its power of purchase 
locked in this form as long as he lists ; the money, 
indeed, is only good to purchase with, but it puts an 
interval at the pleasure of the holder between sell- 
ing and buying, and with this generalized power in 
his pocket he may buy when he will, and what he 
will, and where he will. Money, too, makes any 
purchasing-power portable, divisible, and loanable. 
A man may carry the value of his farm in his purse, 
and may divide it up for a thousand different pur- 
chases, and especially is able to loan it in this form, 
to receive it back again with interest at a future day. 
Value in any other form than money is not gener- 
ally suitable for loaning, because there are com- 
paratively few who are willing to borrow a merely 
specific purchasing-power, and guarantee its return 
in that form with the due increase ; but money, as a 
generalized agent, will command all services at all 



ON MONEY. 193 

times, will serve at any man's bidding, and work in 
all sorts of harness, and therefore it is rarely difficult 
for men to loan any sums of money they have not 
immediate use for, and to make every moment of 
their own abstinence pay tribute in interest, and the 
advantages to both lenders and borrowers secured 
through this form of value — money — are incalcu- 
lable. Thus we see the reason why governments, 
corporations, and individuals, when they borrow, 
borrow money. This general view of the uses and 
advantages of money will show it to be one of the 
most potent of the social agents, and will serve also 
to introduce our first specific proposition. 

1. Money is a medium of exchange. 

The word medium in this proposition, is to be 
taken in its etymological and strict sense, as some- 
thing that comes between two extremes, and serves 
also to relate them to each other. Money is only a 
medium of exchange, and not a real subject of ex- 
change ; it is a very great help in exchanging all 
other things, but is never exchanged for itself in an 
ultimate transaction. Small boys, indeed, swap 
cents, but men, the miser excepted, who is under a 
deplorable fallacy of the senses, use and estimate 
money only as the medium which facilitates the real 
exchanges of society. What is really exchanged is 
the wheat, the cloth, the lumber, the furniture, the 
service of every kind, and money is but the instru- 
ment making these exchanges easy, which might 
indeed go on without it, though with difficulty and 
loss. It is like a railroad ticket. What you want is 
to be carried to a certain place in the cars. That 
is what you really buy and pay for, but for conven- 

13 



194 ■ ELEMENTS OF POLITICAL ECONOMY. 

ience, merely, a ticket is given you, as evidence of 
the purchase. You care nothing about the ticket, 
except that it insures to you a seat. It is a mere 
bit of paper, but it stands you in good stead when 
the conductor comes along. It comes in as a me- 
dium between the railroad company and you, and 
while it facilitates the real exchange, at the same 
time it somewhat disguises it. It is exactly so with 
money, only money, instead of being a specific ticket 
for one purpose, is a general ticket for all purposes 
of purchase. We do not care anything about 
money, any more than we do about the ticket. We 
part with it freely and constantly for those things 
which we do care about. What we really care for 
is what the money will buy, is the command over 
all services and commodities which the possession 
of money insures. If we could give our own ser- 
vice or commodity, whatever it is, and receive 
du'ectly in return the service or commodity which 
we want, whatever it is, there would be no need of 
money. This is generally inconvenient, and some- 
times impossible. Therefore we introduce a middle 
term between the two extreme terms. Money is 
only a mean which helps exchange the two ex- 
tremes. And the value of the money of any coun- 
try is a very small fraction, probably not over one 
fortieth, of the value of that which it helps to ex- 
change. By the last census the estimated value of 
real and personal property in the United States was, 
in round numbers, $r6,000,000,000. The whole 
currency of the country in 1860 was certainly less 
than $400,000,000; so that the money of the country 
stood to its aggregate material wealth in the ratio 



ON MONET. 195 

at least of one to forty. Besides all that portion 
of this real and personal property which clianged 
hands in that year, the currency helped to exchange 
all the simple services, as those of professional men, 
teachers, servants, and so on, which were rendered 
in that year, and which are not included in the cen- 
sus estimate, except partially and indirectly, so far 
as the returns to such services had been transformed 
into real and personal property. If we suppose that 
transactions to the value of $16,000,000,000, were 
concluded in this country in the year 1860, and 
that $400,000,000 constituted the money in circula- 
tion, then it follows that each dollar of money cir- 
culated on the average forty dollars of value, or, 
what is the same thing, each dollar of the circula- 
tion made on the average forty payments, in the 
course of the year. It is, of course, impossible to 
determine with exactness the aggregate value of 
the money exchanges of any country for any given 
period, but if this could be determined, and should 
then be regarded as a dividend, for which the asfaje- 
gate money of the country were a divisor, the quo- 
tient would express what has been called the rapidity 
of circulation, that is, the number of times which 
each dollar changes hands on the average in order to 
effect the given amount of exchanges ; and it would 
also express how many more times the value of that 
is which the money of a country helps to exchange, 
than its own value is. That it should express this 
last, however, accurately, we must suppose that the 
same product is exchanged by the help of money 
only once between the producer and the consumer. 
Probably the ratio of one to forty is below rather 



196 ELEMENTS OF POLITICAL ECONOMY. 

than above the true ratio of the aggregate money of 
the commercial nations to the money value of those 
products, reckoned only once, which this money 
helps to exchange. Therefore we see that the hub 
and spokes, and rim of the wheel of exchange con- 
sist of services and commodities of every descrip- 
tion ; while, to borrow the famous comparison of 
Hume, money is but the grease which makes the 
wheel turn easier. It is a vast mistake to suppose 
that the grease is the wheel itself. 

Hume's comparison, though exact as far as it goes, 
and for the purposes for which he used it, is never- 
theless capable of misleading the mind. It is true 
that money is the grease which facilitates the revo- 
lution of the wheel of exchange, but it is also true 
that the dimensions of the wheel itself are vastly 
greater than they would have been had it not been 
for money. Money indeed helped exchange the prod- 
ucts that already existed at its first invention, but 
by far the largest part of products since have come 
into existence largely through the agency of money. 
We get quite too low a view of the function of 
this potent agent, if we think of it merely as an 
aid in circulating products that would have existed 
whether or no ; some products would have existed 
whether or no, and money certainly is of great use 
and convenience in helping bring these to the ulti- 
mate consumers ; but this is a partial and wholly 
inadequate view of the true function of money as a 
medium of exchange. The fact that such a medium 
is in universal circulation, and that the holders of 
it are ready to exchange it against any sort of ser- 
vices adapted to gratify their desires, exercises a 



ON MONET. 197 

kind of creative power, and brings a thousand prod- 
ucts to the market which would otherwise never 
have come into existence. Since money will buy 
anything, men are on the alert to bring forward 
something which will buy money; and since money 
is divisible into small pieces, an incredible number and 
variety of small services are brought forward to be 
exchanged against these pieces, which services we 
have no reason to suppose would ever be brought 
forward at all, were it not for the strong attraction 
of the money. In this point of view, the true 
nature of money is best perceived, when it is con- 
sidered, as it really is, as a very important portion 
of the capital of the world. Capital, as we have 
already learned, is any product reserved to be em- 
ployed in further production. The circulating me- 
dium of any country is the most active, the most 
profitable, and the most essential of all those instru- 
ments reserved in aid of further production. The 
axe, the plough, the spindle, the loom, the wheel, the 
engine, are all instruments, are all capital, and they 
each aid respectively some part or parts of the pro- 
cesses of production ; but money is a form of capital 
which stimulates and facilitates all the processes of 
production without exception. Just as we have seen 
that money is a form of value generalized, so is it also 
a generalized form of capital, that is' to say, it is an 
instrument capable of aiding all production in every 
department, while every other instrument is capable 
of aiding but few processes in one department. 
"Without money, there could be no thorough divi^^ion 
of labor, because there would be no adequate means 
of estimating or rewarding each one's share in a com- 



198 ELEMENTS OF POLITICAL ECONOMY. 

plicated process. By means of money, all services, 
small or great, contributing toward a common prod- 
uct, are neatly measured and paid for by some 
one, who thereby becomes proprietor of the whole 
product; or, if the contributors chose, th,ey may wait 
till the product itself is sold, and then the money 
received is divisible without loss to each contributor, 
according to the service rendered. Thus the influ- 
ence of money, as capital, pervades the whole field 
of exchange, from centre to circumference, facilitat- 
ing every transfer, and stimulating to new transfers. 

Money, then, is a medium of exchange ; and the 
question arises in this connection, how much of it is 
wanted ? Clearly, only so much as will serve the 
purposes which such a medium is fitted to subserve ; 
there should be enough fairly to mediate between 
the services actually ready to be exchanged then 
and there, and also enough fairly to call out other 
services, proper and profitable in the then circum- 
stances of society, and whose only obstacle to a 
profitable exchange then and there, is the lack of a 
facilitating medium. All increase of money beyond 
this point, which the very nature of money itself 
marks out as the boundary, leads to an inevitable 
depreciation of the whole mass, to a consequent 
disturbance of all existing money contracts, to a 
universal rise of prices which are illusory and gain- 
less, to unsteadiness and derangement in all legiti- 
mate business, and to a spirit of restless enterprise 
and speculation, which seeks to draw off" the excess 
of money in untried and reckless experiments. These 
consequences from this cause have been again and 
again witnessed in every commercial country, and in 



ON MONEY. 199 

the United States on a gigantic scale during the 
past three years. I cannot help thinking that Mr. 
Carey, who has thrown so much light on certain 
portions of the field of Political Economy, is de- 
cidedly in the wrong in the view he maintains that 
there cannot be too much money in any country. 
No writer has brought out more clearly than he has, 
the intimate relations of money with all industrial 
development ; but he seems at times to forget that 
money, essential and potent as it is, is essential 
and potent only as a medium. The real subjects of 
exchange are mutual efforts, mutual services, and 
money is the instrument merely that comes in be- 
tween the real services exchanged to facilitate the 
exchange ; and therefore it seems to me to be per- 
fectly conclusive on the point to remark, that the 
quantity of money needed in any country, or in the 
whole world, is limited by the number of the ser- 
vices ready to be exchanged, to facilitate the ex- 
change of which is the only purpose and end of 
money. The physical and mental powers of men, 
which alone give birth to services, when considered, 
as they must be in this connection, as belonging to 
a given number of men at a given time and place, 
are strictly limited; and although the presence of 
money then and there is both a stimulus and an aid 
to their bringing forward services of all sorts to the 
market, there are obvious limitations both in their 
powers and in their circumstances; and the quan- 
tity of money needed among them is just that 
quantity which will fairly act as a medium in ex- 
changing the services which they are able and 
willing to render to each other. All increase in 



200 ELEMENTS OF POLITICAL ECONOMY. 

the quantity of money beyond that point would 
have, and could have, the only effect of increasing 
the nominal prices of services, without making the 
services themselves any greater in number or better 
in quality. It is with money exactly as it is with 
any other form of capital, allowance being made for 
the fact that money is a kind of generalized capital. 
How many ships does a commercial nation need to 
employ ? As many as will fairly take off its exports 
and bring in its imports. Ships are wanted for one 
definite purpose ; and when enough are secured to 
answer that purpose, all additions to the number will 
lessen the value, that is, the purchasing-power of 
ships generally. So of all instruments whatever. 
Enough is as good as a feast. Enough is better 
than more. In regard to every form of capital, the 
point of sufficiency is determined by the quantity of 
work to be done. Now, money is a form of capital, 
an instrument, having this peculiarity only, that it is 
capable of aiding to a certain extent all branches of 
production ; and the point of sufficiency in the quan- 
tity of money for a country, or for the world, is de- 
termined by the amount of products of all kinds, 
otherwise ready to be exchanged, and only waiting 
the facilitating agency of an exchange medium. 
The quantity of money being given, an increased 
aggregate of exchanges can be facilitated by it, by 
means of a greater rapidity of circulation of that 
given quantity. $400,000,000, changing hands forty 
times, will effect exchanges to an aggregate of 
$16,000,000,000 in a year; the same sum, by a 
circulation doubly rapid, will effect twice that ag- 
gregate of exchanges ; so that, it follows, that an 



ON MONEY. 201 

increased amount of business to be done, does not 
necessarily require an increased volume of money, 
but sometimes only a brisker use of that already in 
circulation. As in mechanics, so in money, the 
whole power is the product of the two factors, 
mass and velocity. Money is like any other tool, 
the more constant its use the more profitable its 
agency. If $16,000,000,000 of value are to be ex- 
changed, it is very much cheaper that $400,000,000 
of money should do the work, changing hands forty 
times, than that $800,000,000 should be employed, 
changing hands only twenty times. The quick 
movement of a small mass is better than the tor- 
pid movement of a big mass, both in what it saves 
of expense, and in what it presupposes of the gen- 
eral conditions of exchange. It only remains under 
this proposition to add, what will be more clearly 
perceived when we come to treat of foreign trade, 
that no enterprising commercial nation, so long as 
the natural right of exchange is left unimpeded, and 
so long as the money of .the nations consists of gold 
and silver, or paper, the genuine representative of 
these, can ever lack, for any great length of time, a 
sufficient quantity of money to serve as its medium 
of exchange. 

2. Money is a measure of value. 

I hope it was made very plain, under the preced- 
ing proposition, what is meant when it is said that 
money is a medium of exchange. Closely com- 
mingled with its function as a medium, money has 
another very delicate function, as a measure of value. 
How important this second function is may be seen 
by supposing for a moment that there were no in- 



202 ELEMENTS OF POLITICAL ECONOMY. 

strument in existence capable of performing it. 
Without a common measure of values of different 
sorts, it would be inconvenient, not to say impos- 
sible, to carry on traffic at all. For instance : A 
baker has only loaves of bread, and wishes to buy a 
hat, a horse, a house. How many loaves shall he 
give for each ? Without some common denomina- 
tion in which these differing values can be expressed, 
and by means of which they can be brought into 
numerical relations with each other, it would be an 
awkward piece of business to effect even the three 
exchanges ; and every time he wished to purchase 
another article, there must be an independent cal- 
culation from different data, to decide the terms of 
the exchange. Introduce now some common denomi- 
nations in which each of these values can express 
itself, and the difficulty disappears in an instant. 
" My loaves are worth ten cents each," says the baker. 
" My hat is worth ten dollars," says the hatter. The 
terms of exchange, then, are 100 for 1, and no par- 
leying. So of the rest ; so of everything that is ever 
bought or sold. Dollars and cents are the denomi- 
nations in which values are reckoned, and by which 
they can be compared with each other numerically, 
just as feet and inches are the denominations by 
which different lengths are compared, and pints and 
quarts the denominations by which capacity is meas- 
ured ; and the builder and the surveyor would not 
be more at a loss in their work without the units of 
length, or the vintner without the units of capacity, 
than everybody would be at a loss without the units 
of value. Dollars and cents are, as it were, the 
language in which values express themselves ; and, 



ON MONEY. 20^ 

without some such language, the busiest marts of 
exchange would soon become not only a silent but a 
deserted scene. 

The difference between money as a medium and 
money as a measure is one that should be clearly 
delineated and perfectly apprehended, because there 
is no such thing as adequately understanding the 
subject of money unless the two functions be kept 
distinct in the mind, as well in their single as in their 
commingled action. There is the same difference 
between money as a medium and money as a meas- 
ure that there is between a bushel of wheat and that 
round vessel by which we determine that there is a 
bushel: dollars and cents perform their duties as a 
medium by virtue of their being commodities ; they 
perform their duties as a measure by virtue of their 
being denominations. For example : A Berkshire 
woollen-manufacturer goes to market to buy wool, 
and calls on five dealers, each of whom demands a 
certain price, and in conversation with each of whom, 
consequently, our manufacturer uses money as a 
measure ; that is to say, uses the denominations as 
a means of comparison ; but with that one only 
with whom a bargain is consummated does he use 
money as a medium ; that is to say, pay it out in 
exchange. The distinction between denominations 
and those things themselves which are reckoned by 
denominations seems a very obvious distinction, 
and one would suppose the two not likely to be 
confounded ; but, the truth is, the two are perpetually 
confounded, even in some of the most recent and 
approved works on money. Indeed, the grand diffi- 
culty and source of error in discussions on money 



204 ELEMENTS OF POLITICAL ECONOMY. 

heretofore has been that this distinction has rarely, 
if ever, been consistently attended to ; and I flatter 
myself that I am doing the science a service at this 
point by calling attention to this confusion, by ex- 
plaining how it arises, and by clearing up, so far 
forth, a vexed portion of the subject. 

How does it happen that money is constantly con- 
founded with the denominations in which it is reck- 
oned, while feet and inches are never confounded with 
lumber or lath, pints and quarts with milk or beer, 
acres and rods with meadows or pastures ? The rea- 
son is this : all other tables of denominations have a 
basis independent of the things which they measure, 
and are not variable by the quality or quantity of 
those measurable things. A French metre, for ex- 
ample, is an invariable unit of length the w^orld over; 
so is one of Troughton's inches ; but this is not true 
of the denominations of money at all. Pounds, dol- 
lars, guilders, francs, and their subdivisions, are de- 
nominations of value, which is a variable relation, 
and as denominations they follow the fortunes of the 
coins whose names they are. When the current dol- 
lar, for instance, sinks to one half, or rises to twice, 
its previous purchasing-power, we call it a dollar all 
the while, the denomination perpetually shifting with 
every variation of the thing, and the illusions and 
mistakes are numberless which result from calling a 
thing which is no longer the same as before by the 
same name as before. Mr. Charles Moran, in his 
late interesting book on " Money," quotes approv- 
ingly from the " Edinburgh Review " the following 
sentence : — " Were an ounce of gold to fall to one 
tenth of its present cost of production, or to cost ten 



ON MONET. 205 

times as much labor as it does now, still, while the 
regulations of the mint are unaltered, it will be worth 
£3 17s. low." 1 Here is an instance of perfect con- 
fusion between the name pounds and the thing 
pounds. No doubt, under either of the conditions 
supposed, the result would be as stated so far as 
pounds, shillings, and pence are denominations ; but 
so far as pounds, shillings, and pence are purchasing- 
powers, there would be a difference in their value 
under the two conditions, other things being equal, 
of 1 to 100. The denominations of value, then, are 
not an independent standard to which values them- 
selves can be referred, as lengths are referred to the 
metre, but vary with the varying purchasing-power 
of the coins, so that money as a measure is only 
uniform when money as a medium is uniform. So 
indispensable, however, in all exchanges is some 
common measure of value, that the denominations 
of money, notwithstanding their variable character, 
are universally employed in estimating and exchang- 
ing commodities, even when no money as a medium 
is used. 

Without reflection, it might be supposed, that, 
since the measure rises and falls with the medium, 
no practical error is liable to follow the confounding 
of the two functions ; but it is the very sympathetic 
connection between the two that gives rise to the 
possibility of error. If the units of money were, 
like the linear units, inflexible, so that all variations 
of the medium could be instantly detected by a ref- 
erence to the standard of measure, there would be 
ho difficulty at all : I could loan a thousand dollars 

1 Money, by Charles Moran. New York. 1863. Page 66. 



206 ELEMENTS OF POLITICAL ECONOMY. 

for one year, or ten years, and, however much the 
medium might vary in the interval, be sure that I 
should receive back just as much purchasing-power 
as I loaned, with the interest on the same ; it might 
be more or fewer dollars than the number I loaned, 
which is a matter of indifference. As it is, no lender 
can have any such assurance. The borrower is 
bound to pay back with interest the same number 
of dollars as he received, although the dollar-medium, 
and hence the dollar-measure, may meanwhile have 
fallen or risen greatly. In the United States, for the 
past three years, the current money has exchanged 
against gold from 130 to 285 of the one for 100 of 
the other; and it is very obvious that all debts of old 
standing, paid in this period, have been only legally, 
and not actually, liquidated ; and that debts con- 
tracted when the depreciation was more and paid 
when it was less were more than actually liquidated. 
This, of course, presupposes, what we are not yet in 
a position to assume, that gold remained a proper 
and uniform standard. The subtle error to be 
avoided alike in discussion and in practice is, to 
suppose that money, either as a medium or as a 
measure, remains unchanged, simply because the 
name remains unchanged by which we designate 
its denominations. 

It may be asked, why cannot this source of error 
be obviated ? I reply, that the error may be obvir 
ated, but the source of it cannot be obviated from 
the nature of the case. It was shown in our chap- 
ter on Value that to find an invariable measure of 
value is a natural impossibility. Money, as it is the* 
medium of exchange, is also the best attainable 



ON MONEY. 207 

measure of value, and is used throughout the civil- 
ized world to compare with each other all values 
except its own ; but since value in general, and the 
value of money as well, is a thing of relation, and 
varies with every change affecting either of the 
things exchanged, as much by changes affecting the 
things it exchanges for as by changes affecting 
itself, — the value of a hat, for instance, as estimated 
in gloves, increasing by any cheapened process in 
glove-making, though no change at all take place in 
the cost of hat-making, — a perfect measure of value 
is impossible. Therefore the denominations of 
money, which is the best attainable measure, can 
never have a meaning absolutely fixed, but slide up 
and down the scale along which the purchasing- 
power of money as a medium is moving, and they 
are consequently useless as a standard to detect any 
changes in the medium itself, while, the medium 
remaining uniform, they instantly detect the changes 
in all other purchasing-powers. This will always be 
so. The same difficulty does not occur in having a 
perfect measure of length or of capacity, — a perfect 
inch or a perfect pint. The French have a perfect 
system of measures and weights. Their mathemati- 
cians measured an arc of the earth's circumference, 
and thus determined the absolute length of a degree 
of latitude. Three hundred and sixty times this 
length makes up the length of the earth's circumfer- 
ence, — an invariable measure recoverable again even 
if it should be once lost. This measure divided by 
40,000,000 gave the French nation their metre, which 
is a perfect unit for the measure of length. A tenth 
part of the metre cubed gave them their litre, which 



208 ELEMENTS OF POLITICAL ECONOMY. 

is a perfect unit for the measure of capacity. The 
weight of a hundredth part of a metre cubed of dis- 
tilled water at the temperature of maximum density 
is the gramme, an invariable unit of weight. A 
linear length of ten metres squared gives the are, the 
unit of surface. A perfect measure of anything de- 
mands for its starting-point something absolute and 
invariable : in value there is nothing absolute ; we 
begin with a relation, and therefore an unchangeable 
measure is not to be looked for. Still, it is vastly 
important for the interest of exchange that the 
accepted measure of value be as little liable to fluc- 
tuations as possible, especially in all cases in which 
lapse of time is involved before the exchange is fully 
consummated. For precisely the same reason that 
the bushel-measure should be of the same capacity 
in sowing-time and in harvest, to sell by and buy by, 
always a bushel, no more and no less ; and the yard- 
stick an inflexible measure of length, the same for 
buyer and seller, always thirty-six of Troughton's 
inches, no more and no less ; so, as far as it is pos- 
sible in the nature of things, ought the measure and 
the denominations of value to represent year in and 
year out a uniform degree of purchasing-power. All 
experience has shown that it is rnuch easier to find 
something which will serve as a medium of ex- 
change, and thus answer the first purpose of money, 
than to find anything which will serve permanently 
as a measure of value, and thus answer the second 
and more delicate purpose of money. The two func- 
tions of money are indeed often commingled, for 
while money helps to exchange values, it also at the 
same time in a manner measures them, but they are 



ON MONEY. 209 

also quite as often separated, as when a hundred 
dollars' worth of goods is sold to be paid for six 
months hence ; and we have just now seen the radi- 
cal reasons why no money which is not tolerably 
uniform in its value as a medium can even tolera- 
bly perform its function as a measure. This con- 
sideration brings us naturally to our third specific 
proposition. 

3. Gold and silver constitute thq best money. 

The purposes of money have been served in dif- 
ferent countries and in different ages by a variety of 
products, according to the taste and circumstances of 
the people. Cattle have been employed as money 
among pastoral people in almost all periods of the 
world, and are still employed for this purpose in 
Africa. Slaves among the Anglo-Saxons; wampum 
among the American Indians; salt in Abyssinia; 
codfish in Newfoundland; tobacco in Virginia; 
wheat in Massachusetts; nails in Scotland; stamped 
leather among the Carthaginians, and others ; bark 
stamped with the image of the sovereign in China ; 
platina in Russia; copper, simple or compounded 
with other metals, among the ancient Romans, and 
most other nations ; iron among the Spartans ; gold 
and silver among all civilized nations sooner or 
later ; have been or still are used as money. Of all 
these products, the two last have shown themselves 
to be best adapted for the purposes of money, and 
have come consequently into universal use in the 
commercial world. Experience has not only demon- 
strated the superiority of these metals over all other 

forms of money, as is shown by the fact of their 
14 



210 ELEMENTS OF POLITICAL ECONOMY. 

universal adoption, but reason also is able to tell us 
why gold and silver are the best money. 

(1.) On account of their comparatively steady 
value. This is the main reason, and it must be 
firmly grasped. There is no end to the confusion 
which has crept over discussions on money from the 
circumstance that the writers have not first of all 
determined for themselves with fixed clearness what 
value is. This mu,st be done at the outset, if there 
is to be the least hope of sound results ; and accord- 
ingly those writers have succeeded best in their treat- 
ment of money who have made its discussion a part 
of a general theory of value. Mr. Moran, who has 
treated money distinctively, and whose book is in 
many respects an excellent one, has failed at this 
point, and for this reason. He does not exactly 
know what value is, and consequently he does not 
exactly know what money is. He speaks of " in- 
trinsic value," of circulating-coin " as losing for the 
time its intrinsic value," of " metallic money as iden- 
tical with paper money in respect of being destitute 
of intrinsic value," and so on.^ Now, value is value, 
and there is only one kind of it, and the epithet in- 
trinsic is only used to help out a lame theory, and no 
such epithet is pertinent to the word value, and no 
one can show anything different in the value of 
money, either in respect to the way in which it 
arises, or in the, laws which control it, from the value 
of any other commodity, excepting only the differ- 
ence already pointed out, that money by the usages 
of society has a generalized instead of a specific 
purchasing-power. It is all false to speak of gold 

1 Page 20, note. 



ON MONEY. 211 

and silver money as the representative of value. It 
represents nothing but itself. It will buy other 
things certainly, and so will a bushel of wheat. 
Value is simple purchasing-power, and money has 
value because we can purchase with it, exactly as 
everything else has value for that very reason. 
Society is so constituted that a want is felt in it of 
some medium of purchase ; this want cannot be 
supplied without an effort; whoever makes the effort 
will demand a corresponding effort made for him ; 
when it comes to the exchange of the medium for 
the w^heat, for example, there stand face to face, as 
in every other instance of exchange, two desires and 
two efforts ; there is then, as always, a reciprocal 
.estimation of the two services about to be ex- 
changed, and the estimation agreed on is the value 
of the medium expressed in wheat. If the want of 
any medium of exchange is less felt in any commu- 
nity, or if the effort required to secure it be for any 
reason less, other things remaining the same, the 
value of the money will be less, that is to say, it 
will purchase less of other things. If the demand 
for money as an instrument of purchase be greater, 
or the obstacles in the way of its supply be increased, 
other things as before, the value of the money will 
be more. It is the old circuit over again of wants, 
efforts, estimations, satisfactions. The value of 
money arises under the same conditions as every 
other value, and is variable by any change in any 
one of the four elements which alone can vary the 
value of anything. Two desires and two efforts 
invariably precede every exchange. A change in 
any one of these, the rest unchanged, can vary value, 



212 ELEMENTS OF POLITICAL ECONOMY. 

and nothing else can vary it; and, as it seems to me, 
no person has ever shown or can show that the value 
of money is in any respect, save the superficial one 
already noticed, exceptional and peculiar. And it 
also seems to me that nothing more is needed in 
order to remove the last vestiges of the dark cloud 
which has so long overhung this subject, than to 
familiarize one's self first'of all with the true doctrine 
of value in general, and then hold fast the truth, ex- 
emplified on every side, that the value of money is 
just like any other value. 

Gold and silver, then, as money, have value in the 
same sense and for the same reason as any other 
productive instrument, and we must now attend to 
the reasons why their value is so steady. 

(a.) On account of the comparatively steady de- 
mand for these metals. Gold and silver are wanted 
for two general purposes : first, to be used as money, 
and second, to be used in the arts ; and it has been 
estimated that about two fifths of the aggregate 
quantity in the world is in the form of money, and 
the other three fifths in the form of plate, utensils, ahd 
ornaments. Now, so far as the element of desire 
controls value, the purpose for which any article is 
desired is a matter of indifference. The aggregate 
desire for it for all purposes, accompanied with the 
offer of something with which to buy it, constitutes 
the demand ; and the more universal the desire, no 
matter for what purpose, the steadier the demand, 
and, so far forth, the steadier the value. It is worth 
noticing, in opposition to Moran and others, that it 
is not the demand for the precious metals as coin 
alone that determines their general value, nor the 



ON MONEY. 213 

demand for them in the arts, but the combined de- 
mand for all purposes; just as the value of barley is 
regulated, partly by the demand for it for food, and 
partly by the demand for it for malting purposes. 
Hence an ounce of bullion of the standard fineness, 
destined for the smelting- pot of the artisan, is worth 
within a very trifle as much as an ounce of coined 
money. By the law of the Bank of England an 
ounce of standard gold is coined into £S 17s. lOuL, 
and the Bank is obliged to buy all bullion and for- 
eign coins of the standard fineness offered to it at 
<£3 175. 9d. per ounce — a difference of three half- 
pennies. Now, gold and silver are so indispenj?able 
in the form of money, so beautiful in the form of 
ornaments, so well adapted to serve the purposes of 
luxury and love of distinction, so really useful in the 
arts, that the demand for them is constant and well- 
nigh universal; and if, in the progress of civilization, 
a less quantity should be desired for personal orna- 
mentation and purposes of luxury, a greater wall 
doubtless be required for the other uses ; and so, as 
the demand in the past has been steady, and perhaps 
steadily increasing, there is every reason to expect 
the same for the time to come. And it contributes 
to the steadiness in value of the gold and silver coin, 
that there is at hand in the form of plate a reservoir 
from which a chance chasm in the coin may be 
replenished, or an extra demand for it answered. 

(b.) On account of their tolerably uniform cost of 
production. Not desires alone, but efforts as well, 
regulate value. Supply is the correlative of demand; 
and when to a steady demand there answ^ers a steady 
supply, realized under conditions of pretty uniform 



214 ELEMENTS OF POLITICAL ECONOMY. 

difficulty, there will be of course a pretty steady 
value. Nature herself has indicated, in a manner not 
to be mistaken, her intention that these metals 
should be the money of the nations. She has 
scattered them all over the earth, and so scattered 
them that the cost of their production has been won- 
derfully uniform ever since civilization and commerce 
begun. There have been but two marked changes 
in the value of gold and silver throughout the com- 
mercial world in the last thousand years ; the first, 
in the sixteenth century, in consequence of the occu- 
pation of Mexico and South America by Europeans, 
when the value of the precious metals diminished, 
according to Chevalier, silver in the ratio of 1 to 3, 
and gold considerably less ; the second, in conse- 
quence of the discovery of the gold-fields of Califor- 
nia and Australia in the present century, which has 
still further diminished the value of gold perhaps 
twenty-five per cent. With these exceptions, and 
similar ones are not likely to recur, these metals 
have always maintained and are likely to maintain 
a remarkable uniformity of value, on account of a 
remarkably uniform cost of production. Even these 
changes became only gradually perceptible, and did 
but little injury to individuals, scarcely disturbing 
the justice of exchange or the measure of value, 
except in cases of long annuities and similar obliga- 
tions. A universal rise of prices soon adjusted ex- 
changes to the new state of things. 

(c.) On account of their quantity. The amount 
of gold and silver in circulation in the commercial 
world, to say nothing of the quantity so easily 
brought into circulation from the reservoir of plate, 



ON MONEY. 215 

is SO vast, that it receives the annual contributions 
from the mines much as the ocean receives the 
waters of the rivers, without sensible increase of its 
volume, and parts with the annual loss by detrition 
and shipwreck, as the sea yields its waters to evapo- 
ration, without sensible diminution of volume. The 
yearly supply and the yearly waste are small iu com- 
parison with the accumulations of ages; and therefore 
the relation of the whole mass to the uses of the 
world, and the purchasing-power of any given por- 
tion, remain comparatively steady. It is probable 
that production at the mines might cease altogether 
for a considerable interval without very seiif^ibly en- 
hancing throughout the commercial world the value 
of gold ; as it is certain, from experience, that a 
production very largely augmented only gradually, 
and after a considerable interval, diminishes its value. 
The mass of the precious metals has been aptly com- 
pared to the heavy balance-wheel in mechanics, 
which preserves an equable and working condition 
of the machinery under any sudden increase of the 
power, and even when the powder is for a moment 
withdrawn. At this point a caution is needful. Be- 
cause it is affirmed that the great amount of the 
precious metals is a ground of their firm value, it 
must not be supposed that we are going beyond our 
general doctrine, and introducing another element, 
namely, quantity, besides the four elements which, 
as we have so often alleged, can alone vary the 
value of any service; quantity, in itself, is not an 
element capable of varying the value of anything, 
but taken in connection with durability, it is an 
element of what might, perhaps, with propriety be 



216 ELEMENTS OF POLITICAL ECONOMY. 

called the inertia of value, and tends to keep the 
purchasing-power of gold and silver where it is. 
Value and steadiness of value are two distinct 
ideas. The present value of an ounce of gold ex- 
pressed in any other commodity is decided by four 
things alone ; but other elements besides these may 
help determine that that ounce of gold shall have 
ten years from now a purchasing-power approxi- 
mately the same as now. It will depend, of course, 
in the last analysis, upon the relation of the then de- 
mand to the then supply; yet the vast quantity of 
the precious metals in existence, combined with 
their durability, prevent those fluctuations in the 
supply which are so destructive to a steady value. ' 
It is not as with the fruits and the grains, whose 
value varies perpetually with the seasons, and which 
are so perishable that they must be sold soon or 
never: gold and silver are almost indestructible, and 
except by wear and accident, the existing mass is 
not liable to be lessened, and in so far as the annual 
production from the mines exceeds the yearly waste 
there is a natural provision made for the natural in- 
crease of demand, to supply the wants of the world 
for currency and for the arts, without much disturb- 
ing the relation of the demand and supply. The 
quantity, in connection with the durability of the 
precious metals, helps preserve to them a tolerably 
steady value from generation to generation. 

{d.) On account of their fluency. Gold and sil- 
ver are in demand the world over. Having great 
value in comparatively small bulk, they are easily 
transported from continent to continent ; and when- 
ever, from any cause, they become relatively in 



ON MONEY. 217 

excess in any counti-y, and thus lose there a por- 
tion of their previous purchasing-power, there is an 
immediate motive to export them to other countries 
where their power in exchange is greater, and thus 
the equilibrium is restored. The value of gold and 
silver throughout the commercial world is thus kept 
pretty steady by the facility with which they are 
carried from points where they are relatively in ex- 
cess to points where they are relatively in deficiency. 
There is a gain in carrying them to those countries 
where their power of purchase is the greatest, be- 
cause more commodities can be obtained for them 
than at home ; and private motives here coincide 
with public welfare, since what the traders do in 
transporting gold and silver, with an eye to their 
own interest, helps maintain at home and abroad 
the steady value of these commodities. This law of 
the distribution of the precious metals b}'^ commerce, 
and the equilibrium of value resulting therefrom, is 
as natural and beautiful as the law which preserves 
the level of the ocean, or that which balances the 
bodies of the planetary system. This has come at 
length to be recognized by the nations, and the laws 
which used to forbid by heavy penalties the expor- 
tation of gold and silver are all swept away, and 
these metals are now free to go, and do actually go, 
where they can obtain the most in exchange. It is 
absurd to suppose that their owners would carry 
them out of a country, unless they were worth more 
abroad than at home, and therefore the prejudice 
which exists still in this country against the expor- 
tation of gold is a senseless prejudice. The gold is 
not given away ; it is sold, and sold for more than it 



218 ELEMENTS OF POLITICAL ECONOMY. 

will buy at home ; otherwise it would not be carried 
abroad. There is the same kind of gain as in all 
other exchanges, and this great incidental advantage 
in addition, that, by means of free commerce in the 
precious metals, their general value is kept pretty 
uniform throughout the world, and a chance redun- 
dancy in one cun-ency is drawn oif to supply a cor- 
responding dejEiciency in another. It may be laid 
down as an axiom, that no country will export, for 
the sake of getting other things, those things which 
are more needful for its own welfare ; and there 
need not be the slightest fear that any nation which 
cultivates its own advantages under freedom wUl 
ever lack a sufficient quantum of the precious metals. 
Under freedom, and so long as human nature con- 
tinues what it is, these metals will go, and go in just 
the right proportions, to and from those countries 
which produce and offer in exchange those desirable 
services which other countries want. The greater 
the enterprise and skill, the keener the development 
of all peculiar and presently available resources, the 
more honorable and free the commercial system, the 
surer is any nation, whether it be a gold-bearing 
country or not, of securing the gold and silver which 
it needs. This is so, because there will be a good 
market to buy in, and they who have gold will 
resort thither to buy. But such a nation will also 
want to buy other things besides gold and silver, and 
when enough of the latter are secured for the cur- 
rency and for the arts, the residue will be exported, 
perhaps to the very countries from which it orig- 
inally came, in payment for some products which 
those countries have an advantage in producing. 



OJf MONEY. 219 

The United States is a gold-producing country, and 
exported in the years 1850-1860, both inclusive, 
$502,789,759, coin and bullion ; and during the 
same period we imported from other countries 
$81,270,571, coin and bullion.^ Now, there was a 
double advantage in that exportation. In the first 
place, more and better commodities were secured to 
the country than the gold could have bought in the 
country, for otherwise it would not have been carried 
abroad ; and, in the second place, this large sum car- 
ried abroad to various countries in exchange, not 
only prevented the disturbing effect on our own cur- 
rency of more than doubling in ten years' time our 
stock of gold, thus inevitably depreciating the whole 
mass, but also, by causing the new gold to impinge 
on the whole world's stock instead of on the cur- 
rency of a single nation, the shock of the new pro- 
duction on the measure of value, though perceptible, 
was reduced and deadened. The world's mass of 
the precious metals is comparatively torpid beneath 
the action of an accretion which would break down 
by its weight the currency of a single nation. There- 
fore, the fluency of gold and silver, by which they 
pass easily in commerce to those places where their 
present va^ue in exchange is greatest, and return as 
easily when the conditions are reversed, tends pow- 
erfully to make their general value uniform through- 
out the world, and consequently to make them the 
best medium of exchange and the best measure of 
value. 

(e.) On account of this circumstance, that every 
general rise or fall in the value of gold and silver 
tends to check itself This principle, indeed, is ap- 

1 Report on the Finances, 1863. 



220 ELEMENTS OF POLITICAL ECONOMY. 

plicable to the value of all commodities, but owing 
to their quantity and durability preeminently appli- 
cable to the value of the precious metals. The check 
is double in either direction. First, let us suppose 
that the purchasing-power of an ounce of gold or 
silver be rising : then, production will be stimulated 
at all the mines, and the more stimulated as the rise 
is more, and the new and enlarged supply will tend 
to check a farther rise, and, unless the permanent de- 
mand has been intensified, to bring back the value 
to the old point ; moreover, when there is a rise in 
the value of the coin, there is a less quantity required 
to do the same amount of business, and the demand 
for gold which causes the rise tends to be checked 
by the rise itself, because a less quantity is needed 
in the currency in consequence of the rise. This 
supposes, of course, that the exchanges mediated by 
money are no greater than before. Thus a rise of 
value in gold and silver checks itself by natural 
laws in two ways. Just so of a fall in their value. 
Production is thereby slackened at the mines, and 
the lessened supply tends to enhance value ; and, if 
the same business is to be done as before, there is a 
stronger demand for currency while the fall con- 
tinues, and this demand tends also to restore the 
value. All this is in the interest of a steady value. 

(/.) On account, lastly, of this circumstance, that 
a stronger demand for currency is met either by 
increasing the stock of coin, or by an increased 
rapidity of circulation of that on hand. A brisker 
demand for money, especially if it be temporary, 
does not necessarily enlarge the supply, or alter the 
value, but only hurry round the existing circulation. 



ON MONEY. 221 

Oscillations in the demand are responded to by a 
slower or more rapid circulation. This tends most 
admirably to keep the value steady within certain 
limits. When enterprises are multiplying and ex- 
changes are being permanently increased in number 
and variety, then there must be a larger amount of 
money, and this larger amount is secured in the 
ways already indicated, with perhaps slight disturb- 
ances of value ; bvit the temporary ebbs and flows 
of business have no effect at all on the mass of 
money, but only on its movement, and its value con- 
sequently is not disturbed at all. 

These six grounds appear to be satisfactory and 
sufficient to account for the superior steadiness of 
the value of gold and silver, so far as their value is 
determined by considerations relating to the metals 
themselves. We now proceed to the reasons addi- 
tional to this why gold and silver constitute the 
best money. 

(2.) Because they are self - regulating. These 
metals came to be, and continue to be, money, 
independent of the enactments of any government. 
Government indeed coins them for the use of the 
people ; but coinage is nothing in the world but a 
public attest to the quantity and quality of the metal 
contained in the coin. For the trouble and expense 
of assaying, stamping, and thus attesting the quan- 
tity and quality of the metal in the coin, govern- 
ments usually charge the depositors of bullion a 
small seigniorage ; England, France, and the United 
States charging at present for gold coins, respec- 
tively, three half-pennies per ounce, which is coined 
into £3 176'. 10.i</., i of 1 per cent, and ^ of 1 per 



222 ELEMENTS OF POLITICAL ECONOMY. 

cent. ; so that a very insignificant part of the value 
of coins is due to the process of coining. The value 
of coined money regulates itself on just the same 
principles as the value of wheat regulates itself, and 
governments are as powerless to alter the one as the 
other. Indeed, the coining of either metal by itself 
is a matter of quantity and quality alone, and not a 
matter of value at all: the United States say by 
law that a gold dollar shall consist of 25f grains 
troy, of which nine parts shall be pure and one 
part alloy, but of the value of this dollar thus 
coined the law says nothing. It can say nothing. 
The coin is publicly attested so heavy, so fine, and 
thereafter it takes its chance as to value. All gov- 
ernments have now learned, after oft-repeated and 
always vain trials to regulate the value of their coins, 
that all they can do is to regulate the amount and 
fineness of the metals contained in them. When, 
however, it is designed that both metals shall circu- 
late in the same currency, then it becomes necessary 
that government shall determine, as well as it can, 
not the absolute value of either, but the relative 
value of each in each. And here too the value of 
each, ^estimated in the other, regulates itself inde- 
pendently of edicts or enactments. If the legislators 
can ascertain in what proportions they are exchang- 
ing for each other in a free market, they may mark 
that as the legal relative value of the two, but they 
must not suppose that their \V"ork will not require 
revision from time to time. In 1792, when the mint 
of the United States was established, the relative 
value of gold and silver was fixed by law at 1 to 15, 
which was the legal rate at that time in France and 



ON MONEY. 223 

other European nations. It was soon noticed, how- 
ever, that the gold coins issued from the mint did 
not come much into circulation, but were always 
sent abroad in preference to silver to liquidate bal- 
ances in trade. The truth was, the ratio of 1 to 
15 was an undervaluation of gold, that is, a legal 
valuation beneath the real valuation ; &,nd the gold 
coins would not circulate in a currency in which 
they were undervalued. It was beneath their dig- 
nity. They prefen-ed to go, and went, where they 
had more consideration in exchange. The law of 
the mint had tried to find the true point of relative 
value as determined by the laws of Nature, but did 
not hit it, and the real value held right on in spite 
of mint and Congress. To remedy this state of 
things, the legal ratio of value was changed to 1 to 
16, iu 1834, being an increase on the former mint- 
valuation of gold, as compared with silver, of GiVir 
per cent. But this was going too far. Thereafter 
the silver coins, being legally undervalued, were 
worth more in commerce than in the currency, and 
the foreign balances were preferentially liquidated 
in silver. This continued till 1853, when important 
changes were effected. By the preexisting laws, gold 
and silver coins were each a legal tender for any 
amount ; but at this time silver ceased to be a legal 
tender, except for amounts under five dollars; and the 
mint ceased coining silver for individuals, and, buy- 
ing silver bullion at the market price, coined it only 
on government account, at the same time slightly 
debasing the coins, so that they should not be ex- 
ported. Since 1853, therefore, gold has been the 
legal currency of the country, and silver has been 



224 ELEMENTS OF POLITICAL ECONOMY. 

entirely subsidiary to that, and yet the value of silver 
bullion has steadily maintained itself by natural 
laws, and from November, 1858, to January, 1862, it 
appreciated from |1.21 to $1.22 1 per ounce troy ; 
from which is minted $1.25 in silver coins, making 
the seigniorage for coining, when the price is $1.21 
per ounce, SfV per cent. In the first decade of the 
operation of this law, $48,513,037.50 of silver coins 
issued from the mint. In England silver is similarly 
treated ; since 1817 it is legal tender only for forty 
shillings and under, the coins are slightly debased, to 
prevent their exportation as coins, and the issue de- 
partment of the Bank of England is only allowed to 
hold silver as the basis of circulation to the extent 
of one fourth of the gold coin and bullion held at 
anyone time; and yet silver maintains its own value 
in England in spite of these disadvantages, and is 
thought to comprise about one fifth of the whole 
metallic circulation. 

These statements go to show that the value of 
gold and silver is self-regulating, and even their rela- 
tive value in each other is a matter which govern- 
ments endeavor to discover rather than arbitrarily to 
fix. The legal ratio has been repeatedly varied by 
the governments under which both metals were 
legal tender, according as the real relative value 
varied or was supposed to have varied. The gen- 
eral relative yaluation now in Europe is 1 to 15 J. 
The English overvalue legally their silver coins, in 
order to keep them at home, having made the ratio 
1 to 14.287. For the same reason the United States 
overvalues the silver coins in something like the 
same proportion. It may be asked, why govern- 



ON MONEY. 225 

raents attempt to maintain a double standard, if the 
real relative value of the two metals be so indepen- 
dent of the action of law, and require so frequent 
revision ? One answer is, that it is a convenience to 
have at least two metals in the currency, so that 
silver coins may serve for the lesser exchanges, for 
which gold-pieces would be inconveniently small; 
and gold coins for the greater exchanges, for which 
silver-pieces would be inconveniently large. Most 
currencies, our own included, have also a third metal 
or mixture of metals, to serve the purposes of the 
smallest exchanges, and the coins made of this are 
usually largely overvalued, — our nickel cents at 
present cost the government about half a cent, — 
and are not legal tender except to the amount of 
the smallest silver coins. Our copper cents have 
always been rather counters than coins, and our 
smaller silver coins, that is, the half-dollars and 
lesser pieces, in so far as they are at present de- 
based, so far forth resemble counters ; and there is 
no objection to this, so long as their overvaluation is 
well understood, and they are not made legal tender. 
Our gold coins are value-money purely, while a 
nominal dollar's worth of the smaller silver coins 
are intrinsically 7-^^^j per cent, less valuable than 
a silver dollar, and the cents are about 100 per 
cent, overvalued. This statement accounts for the 
fact that the silver dollar-piece does not come into the 
circulation at all, and that the smaller silver-pieces 
when sent abroad, as for instance to Canada of late, 
circulate at a large discount, or are rejected alto- 
gether. Another reason for the double standard, 
especially in those nations in which both metals are 

15 



226 ELEMENTS OF POLITICAL ECONOMY. 

a legal tender, is the increased stability in value 
thereby secured to the whole currency. The relative 
value of the two requires careful watching and fre- 
quent readjustments, but then, the immense quan- 
tity in the world of both metals combined, and the 
opportunity which the double standard furnishes of 
replenishing a chance deficiency of one from the 
the stores of the other, give, in accordance with prin- 
ciples already explained, superior stability in value. 

It is, then, a principal merit of metallic currencies, 
that the gold and silver comprised in them determine 
their own value by natural laws, both relatively to 
each other and to all other purchasable things ; and 
hence the quantity required in each currency of the 
world to do the business of that country is a matter 
which natural laws are perfectly competent to regu- 
late, without any direct action of government ; and 
governments may be relieved from the difficult or 
rather impossible task of determining how much 
money their country shall have. The distribution 
of the precious metals over the earth by commerce, 
according to the wants and circumstances of each 
country, is not perfectly accomplished at present by 
the natural laws which are competent thus to dis- 
tribute them, because some of the nations use still 
some form of credit-money as a part of their cur- 
rency, and also because all the nations have not yet 
come to an agreement as to the degree of fineness of 
the metals used in their respective coinage. These 
obstacles impede somewhat at present the action of 
the comprehensive laws which will one day be 
allowed to control this matter perfectly. Nature 
herself has made the first grand provision for the 



ON MONEY. 227 

self-regulation of the money of the world, by making 
pure gold and silver of exactly the same quality all 
over the wide earth. No matter where it is mined, 
or when, gold is gold and silver" is silver. The gold 
mined to-day in California differs in no essential 
respect from the gold used by Solomon in the con- 
struction of the Temple. So that, if the commercial 
nations would come to a common agreement as to 
the amount of alloy they will put into their coins, 
and then bring these coins, as might easily be done, 
into decimal or other easy numerical relations with 
each other, it would be a matter of indifference to 
every nation whether the coins circulating therein 
were exclusively national coins or not. Foreign 
coins, to the extent to which commerce would natu- 
rally bring them there, would have just the same 
circulation and credit as their own : there would not 
be, as now, the trouble and expense of melting up 
and recoinage ; the balances of trade could be paid 
indifferently in any coinage, and, as we shall soon 
see, every nation would secure without friction or 
legal enactment its due proportion of the money of 
the world. We are not now so far removed from 
this state of things as might at first sight be sup- 
posed. The gold napoleons of France, for example, 
circulate without difficulty all over the continent of 
Eui'ope, and are largely current in Asia and Africa. 
In respect to the degree of fineness, I find by a refer- 
ence to the Report of the Director of the United 
States Mint for 1862, that the standard of the United 
States for both metals, namely, i^jy fine, is also the 
standard of eight gold coins and eleven silver coins 
of different foreign countries, while the average of 



228 ELEMENTS OF POLITICAL ECONOMY. 

all the rest of the foreign coins would vary but little 
from that. France, the United States, Belgium, 
Switzerland, and some of the states of Germany, 
have already adopted this as the standard for their 
new coins; it is decimal and convenient, and the ten- 
dency seems to be decidedly towards its general 
adoption. England, however, adheres to her old 
standard of 1-^. K a commercial congress, like those 
which have been held of late years in Europe, should 
agree to recommend to the governments the adop- 
tion of this standard, giving the cogent commercial 
reasons therefor, the recommendation would doubt- 
less be adopted, and one obstacle to the perfect self- 
regulation of the world's money would be removed. 
In respect to the decimal or other easy numerical 
relation of the different coins to one another, that 
would not be a matter of very great difficulty. From 
the report just referred to it appears, that, with a 
very slight change in the quantity of gold and silver 
put into their coins, the money of all the leading 
nations might circulate in common, without the least 
perplexity. The difference in value at present is 
very trifling between five American dollars, one 
English sovereign, twenty-five French francs, five 
German rixthalers, one hundred Spanish reals, five 
Brazilian milreis, and five dollars of the Central 
and South American States. If by a commercial 
congress, or otherwise, the money denominations 
of the few remaining commercial states could be 
brought into relation with these, so that all should 
be divisible by five, then each nation might keep its 
own names of coins with which it is familiar, and 
yet the money of all circulate everywhere without 
discount or difficulty. 



ON MONET. 229 

Now, although the Bank of England circulates a 
paper money partly based on government credit, 
and though the United States has under the nation- 
al banking law a similar paper money ; yet every 
pound or dollar of this paper money is or is to be 
redeemable in gold and silver ; and, as more than 
half the aggregate circulation of Great Britain is 
in metallic money, and as a similar proportion is 
perhaps likely to prevail in the United States, the 
maintenance of a paper money based on credit for 
the home circulation alone may or may not be sound 
financial policy ; but it is evident that it cannot, un- 
der these circumstances, substantially interfere with 
the self-regulation of the metallic money of the 
world. Nevertheless, that we may see with distinct- 
ness the scope and efficiency of the magnificent 
natural law which distributes the precious metals 
over the earth in accordance with the business-wants 
of each nation, let us suppose that there were no 
paper money ; that all the nations minted their met- 
als with a common proportion of alloy ; and that 
the real relative value of the two were ascertained 
by law in the countries where both are legal tender, 
and were well understood also in the other coun- 
tries. In this case there would be no motive to 
debase any part of the coinage to prevent its expor- 
tation, and all the money of all the nations would 
be value-money purely. Now then, money is the 
medium of exchange, and is wanted where the ex- 
changes are, and not elsewhere, and goes of neces- 
sity under freedom whither it is relatively most 
wanted, that is to say, whither the most can be 
obtained for it in exchange. If the country be gold- 



230 ELEMENTS OF POLITICAL ECONOMY. 

bearing, and its people at the same time be enter- 
prising in the production of all sorts of services for 
exchange among themselves, they will retain enough 
of their own gold to mediate their own exchanges, 
for the simple reason that they want it, and have 
services to offer in exchange for it ; and if they have 
been allowed in freedom to develop their own pecu- 
liar advantages, no foreign nation can outbid them 
in the offers they are able to make for a sufficient 
quantity of this gold. If foreigners draw away the 
gold from them, it shows that the home people have 
less industry and less skill to produce those things 
which the gold-producers want. The home people 
have the advantage in one respect. They are on the 
spot. There is less expense to them than to foreign- 
ers in transporting the services offered in exchange 
for the gold, and also the gold received in return. 
If, with this advantage, foreigners can still outbid 
them in offers for the gold, it shows that they need 
it most and deserve it most, since they have had the 
industry and the skill to produce that which is pre- 
ferred by the miners to the home services offered, 
and have also overcome an additional obstacle. The 
gold-producer, like every other producer, has the 
right to get the most he can for his service. Who- 
ever can offer him that most has the best right to 
the gold. Therefore the gold goes in the first in- 
stance into their hands, whether natives or foreign- 
ers, who offer the most for it in exchange. If the 
people of the gold-bearing country have equal natu- 
ral advantages with others to produce those things 
which are wanted in exchange for their gold by 
those who practically work the mines, and then fail 



ON MONEY. 231 

to get the gold they need, the blame lies nowhere 
except on their lack of industry and skill. Let not 
such people think to find any shelter behind natural 
laws. Natural laws are justly and eternally against 
them. If, however, they are naturally placed at a 
disadvantage in respect to those specific products in 
demand by the first owners of the gold, they are 
then brought into the same category with non-gold- 
bearing countries. They will then get their gold at 
second hand, and if they deserve it, will be just as 
sure to get it as if they retained it in the first in- 
stance. Every nation has natural advantages in 
some sorts of products. Just so soon as these are 
properly developed, it has some things to offer to the 
world at a better rate than anybody else can offer 
them. Thither, and to buy those things, will gold 
flow, if not directly from the gold-producing lands, 
then indirectly but inevitably, from those lands 
where the gold at present is. Under our supposi- 
tion, it makes no difference where the gold came 
from, or what nation minted it, it is drawn by a 
natural force not to be resisted to that people, 
which, by offering services in general demand, re- 
quires gold to mediate the exchange of those ser- 
vices. Thus, by a law as unerring as gravitation, 
the precious metals make the circuit of the earth, 
abiding certainly in large masses within all the com- 
mercial nations, because there is where they are con- 
stantly wanted and cannot be spared, but passing 
off" also perpetually in smaller masses from all the 
great centres of business towards those points where 
their purchasing-power for the time being is greater 
than at home. The one only impulse that can stir 



232 ELEMENTS OF POLITICAL ECONOMY. 

the precious metals from their usual haunts, is the 
belief that elsewhere they are worth more in ex- 
changes ; and hence, just as soon as the demand 
for a currency is fairly met in any country by the 
presence of gold and silver, coin ceases to flow 
thither as a permanent thing, but rather ebbs and 
flows in obedience to the ever-shifting exigencies of 
trade. The nation that does a large business will 
require a large stock of coin, will be able to pay for 
it, and will inevitably secure it ; a nation with fewer 
exchanges to make will less need the instrument 
with which exchanges are made, will buy and keep 
a less quantity; and if, in the chances of trade, 
more comes than is needed, it flows off at once to 
the places where the demand for it is stronger ; and 
thus the proportionate amount due to the commer- 
cial interests of every nation goes thither under a 
natural law, and abides there under a natural law. 
Hence the general purchasing-power of gold and 
silver tends steadily to an equality the world over. 
'If it be appreciably higher in one nation than in 
the others, the metals are drawn toward that nation 
by an irresistible attraction till the equilibrium is re- 
stored. Add to this, that there is at all times a vast 
reservoir of plate from which any sudden or steady 
demand for currency can easily be supplied, and in- 
to which any fortuitous or steady superfluity can 
as readily be drained, and the reasons are apparent 
why gold and silver currencies are self-regulating in 
value and amount. If, on the other hand, a cur- 
rency is to be of paper, independent of gold and 
silver, there is no self-regulation about it : we pass 
at once from the region of natural laws into the 



ON MONEY. 233 

region of statute and enactment ; somebody must 
take upon themselves to decide how much of this 
paper there shall be, — a power which could not be 
lodsfed in more dangerous hands than in those which 
thought themselves competent to exercise it. 

(3.) Because they are conveniently portable, divis- 
ible, and impressible. Our proposition is, that gold 
and silver constitute the best money ; and in proof 
of this we have already demonstrated the steadiness 
of their value, and their self-regulating power ; inci- 
dental to these gi-eat advantages are the material 
qualities of these metals, by which they are admi- 
rably fitted to be the money of the nations. Their 
weight is little relatively to their value. A thousand 
dollars in gold are not indeed carried so easily as a 
bill of exchange or a bank-note ; and expedients are 
easily adopted, and always have been used, by 
which the transfer in place of large masses of coin 
is for the most part obviated ; and our proposition 
does not deprecate at all the use of the economiz- 
ing expedients of commerce ; but for the money of 
the people, for the currency tliat passes from hand 
to hand in ordinary exchanges, we maintain that 
gold and silver are sufficiently portable. A pound 
weight of English sovereigns, which one can put in 
a glove-finger and carry in his vest-pocket, almost 
without knov/ing it, is worth about ^230; and the 
experience of those countries, like France and Ger- 
many at present, where the money is mostly metallic, 
has not pronounced it onerous on account of its 
weight. At any rate, it is better to accept all the 
other immense advantages of gold and silver money, 
together with a little inconvenience as to weight, if 



234 ELEMENTS OF POLITICAL ECONOMY. 

one chooses to insist on that, than to adopt substi- 
tutes every way inferior as money, except that they 
are lighter in our purses. 

Moreover, gold and silver differ from jewels, and 
most other precious things, in that masses of them 
are divisible, without any loss of value, into pieces 
of any required size. The aggregate of pieces is 
worth as much as the mass, and the mass as much 
as the pieces. For currency purposes this is a great 
advantage. For its utmost convenience, business 
requires a considerable variety of coins, and if any 
of these kinds be minted in quantity in excess of 
the demand, nothing more is required than to remint 
them in other denominations, and their whole value 
is saved to the currency in the most convenient 
form. It is this quality which enables coins to flow 
into plate whenever the metal in them becomes 
more valuable in the form of plate, and plate again 
to flow back into coins whenever the metal in it is 
more in demand as coin. 

Lastly, these metals are capable of receiving and 
retaining any stamp which government chooses to 
impress upon them. A certain proportion of alloy, 
say x'o, hardens them to such a degree that they ex- 
hibit with sharp distinctness the cut of the die, and 
permanently retain its impress. This quality of the 
metals, when they are skilfully coined by the im- 
proved machinery of modern times, makes the 
pieces of money objects of beauty, and practically 
indestructible also, since the perfect circular form, 
the device covering the whole piece, the milled and 
fluted edges, make clipping without detection im- 
possible, while the hardness of the pieces makes the 



ON MONEY. 236 

annual loss of weight by abrasion scarcely appre- 
ciable. The Director of the United States Mint, in 
his Report for 1862, gives the results of some care- 
ful and comprehensive experiments made at the 
mint to ascertain the yearly loss of coins by the 
ordinary wear and tear of circulation. These re- 
sults are exceedingly interesting and important, and 
throw to the winds the haphazard conjectures of a 
host of writers on either side of the Atlantic. On 
our silver coins, taken promiscuously, the average 
annual loss from abrasion was ascertained to be 
one part in 630 ; while the gold coins were tested 
separately, with this satisfactory conclusion, that the 
half-eagle averages a loss per annum of one part in 
3550, the double-eagle one in 9000 ; and a cautious 
estimate as to the proportions of the various sizes 
of coin actually in circulation in the United States, 
made of the two metals, leads consequently to the 
conviction that the average yearly waste by wear on 
all the coins does not exceed one part in 2400. The 
cost, therefore, of maintaining a metallic circulation 
is by no means so great as it has been usually repre- 
sented. An instrument in constant use that requires 
only 54\jo of its value for its yearly repair, and per- 
forms exceeding well the most delicate and impor- 
tant functions, is a cheap and durable instrument. 

From these three main reasons, we conclude that 
gold and silver are the best money. 

4. An inferior money, so long" as it circulates at all, 
invariably drives a superior money out of the circula- 
tion. 

This is a fundamental law of finance, and has 
been illustrated over and over again in every age and 



236 ELEMENTS OF POLITICAL ECONOMY. 

nation. It is as solid as the substance of truth can 
make it, though it looks at first sight like a paradox. 
We naturally think that what is excellent tends 
rather to displace what is inferior, but with money 
the exact reverse is the law, and the perfect coin of 
full weight, instead of driving out the light and the 
debased pieces, is always itself driven out of the 
circulation by them. The reason is obvious from 
the nature of money. Money is merely an instru- 
ment of exchange, and nobody wants it except to 
buy with, and so long as the government and the 
community treat light coin and full coin as of equal 
value, receiving them indifferently in payment of 
debts and of taxes, it is clear that nobody will give 
in payment of debts and of taxes that which is really 
worth more so long as that which is really worth less 
will go just as far. The inferior pieces will abide in 
a market where they will fetch just as much as the 
superior pieces, while the superior pieces will take 
on a form or migrate to a place in which some 
advantage can be gained from their superiority. 
Thrown into the crucible, or exported in commerce, 
this superiority immediately manifests itself; and 
therefore into the crucible or into the channels of 
foreign trade it might be confidently predicted before- 
hand that such money would be thrown, and all ex- 
perience testifies with one voice that exactly those 
are the destinations of such money. Mr. Macaulay, 
in the twenty-first chapter of his history, mentions 
that Aristophanes, the Greek comic poet, in the fifth 
century before Christ, was the first writer who haS 
noticed the fact that where good money and. bad 
money are thrown in together the bad money drives 



ON MONEY. 237 

out the good. The verses of the poet allude to the 
tendency as well known, and refer it to the naturally 
depraved taste of his fellow-citizens, like that which 
led them to entrust state affairs to such men as 
Cleon, whom he was satirizing ; but, in truth, as we 
have seen, the tendency results from the common 
sense of men, which revolts at the idea of using a 
dearer instrument when a cheaper one will answer 
just the same purpose. 

Out of a crowd of good illustrations of this law, I 
shall first select two which occurred in purely metal- 
lic currencies. The Dutch city of Amsterdam be- 
came in the seventeenth century a centre of trade 
for all Europe. The mercantile honor and solid 
financial ability of its merchants was proverbial all 
over the world ; and yet it was noticed, about the 
year 1609, that bills of exchange on Amsterdam 
were always below par in other countries. The 
merchants had never failed to meet all the paper 
drawn on them with the utmost promptness, and the 
discount on this paper in other markets was a won- 
der to everybody. On search, however, it was found 
that the cause of all this was in the currency of the 
city. The extensive trade of Amsterdam brought 
into it large quantities of dipt and worn foreign coin, 
which circulated in the currency of the city, and 
reduced its value about nine per cent, below that of 
good money fresh from the mint. It was noticed, 
that the good money of full weight which the mint 
of Amsterdam poured into the circulation by wagon- 
loads, did not stay in the circulation ; that very few 
of such pieces were told out in the daily exchanges ; 
it was ascertained that they were melted up, or 



238 ELEMENTS OF POLITICAL ECONOMY. 

carried away to other countries, in either of which 
cases their value corresponded to the value due to 
their weight and fineness, while at home in the cur- 
rency their value only corresponded to the average 
value of the depreciated coins which constituted the 
bulk of the circulation. Bills of exchange, conse- 
quently, drawn on Amsterdam were liable to be 
paid in this depreciated coin, and the exchange was 
against the city even more than the coin was depre- 
ciated ; because, the currency in such an uncertain 
state was naturally valued abroad even below what 
it was really worth. To meet this state of things, 
and bring up its exchanges to par, the city of Am- 
sterdam, in 1609, established its celebrated bank. 
The bank received the dipt and worn coin which 
was circulating in the city, at its true value accord- 
ing to present weight and fineness, and after deduct- 
ing a small charge for expense of recoining, and 
another small charge for management, gave a credit 
on its books for the remainder. This credit was 
called bank-money; it represented, guilder for guilder, 
money actually in deposit, and money too exactly 
according to the standard of the mint. The city 
ordered that all bills drawn on Amsterdam of more 
than six hundred guilders' value, should Tdb paid in 
bank-money ; thus every considerable merchant was 
obliged to open an account with the bank, and make 
his deposit. This instantly took away all uncertainty 
from bills of exchange drawn on Amsterdam. They 
went up to par at once in every market in Europe. 
This was the basis of the simple and beneficent 
operations of the Bank of Amsterdam, an institution 
which enjoyed unlimited credit in the commercial 



ON MONEY. 239 

world for nearly two hundred years. The conven- 
ience of this bank-money ; its unvarying character; its 
security from fire, robbery, and other accidents; the 
fact that the city was bound for it; and the demand 
for it occasioned by the fact that every merchant 
must have some of it, that is, must keep an account 
with the bank, in order to pay his foreign bills of 
exchange, gave the certificate of deposit, or the bank- 
money, a constant premium of about five per cent, 
over the good coin of full weight which came into 
circulation without difficulty as soon as the poorer 
coins were drawn into the bank for recoinage. 

At the close of the same century, a similar series 
of events occurred on a much larger scale in Eng- 
land.i The old silver coinage of England was by a 
rude process introduced into that country by artists 
from Florence as early as the thirteenth century. 
The pieces were shaped and stamped by the hammer. 
They contained some a little less and some a little 
more than the due amount of silver ; few of them 
were perfectly circular ; the edges were neither milled 
nor fluted ; the image of the sovereign occupied the 
centre of the pieces, and the superscription ran around 
the edge, but not so near it as that the letters were 
necessarily impaired by a little clipping. Conse- 
quently it was easy to pare off a pennyworth or two 
of silver from the crowns, half-crowns, and shillings, 
and then pass them along. It became a profitable 
branch of industry. It was in vain that Elizabeth 
enacted that the clipper should be henceforth liable 
to the penalties of high treason. About the time of 
the Restoration, that is, about 1660, it was noticed 

1 Macaulay's History, Chap. 21. 



240 ELEMENTS OF POLITICAL ECONOMY. 

that a large proportion of the silver coin of the 
realm had undergone some degree of mutilation. 
At that time a new process of coinage was brought 
in. A mill worked by horses fabricated the new 
coins on better principles. They were exactly round, 
and the edges were inscribed with a legend, and they 
were all of just and equal weight. They were 
thrown out into the circulation to pass current with 
the hammered money, and it seems to have been 
expected that they would soon come to displace it. 
But they did not. Both were received at first with- 
out distinction by the individual traders and by the 
public tax-gatherers. But it was not long before the 
milled money was noticed to be scarce. One hardly 
saw a piece of it in a fortnight. The horses at the 
mint were all the time tugging away, and the bags 
of fresh money were carried continually from London 
Tower to London town, but the new money never- 
theless became scarcer every day. Li the payments 
made at the Treasury not one piece in two hundred 
was milled silver, and a merchant complained that, 
being paid a debt of thirty-five pounds, he only got 
one half-crown of good money. Indeed, the money 
was getting perpetually worse. False coiners mul- 
tiplied, and clippers abounded more and more. The 
penalties of an extreme law were utterly powerless 
to restrain the mutilation of the coins; until, at length, 
public opinion decidedly turned against the promis- 
cuous hanging of clippers ; officers were reluctant to 
arrest, and juries reluctant to convict, and the people 
sympathized with the sufferers as only guilty of a 
moderate fault. Thus things went on till 1695. 
The lighter the old coins became, the scarcer became 



ON MONEY. 241 

the new ones ; for who would pay two ounces of 
silver when one ounce was legal tender ? The new 
money was melted, was exported, was hoarded, but 
circulate it would not. At length the lightest pieces 
began to be refused by some people, and other peo- 
ple demanded that their silver should be paid to th^m 
by weight and not by tale, and there was wrangling 
over every counter, and a dispute at every settlement, 
and the coin was really so diverse in its value that 
there was no longer any measure of value in the 
kingdom ; business was in utmost confusion, society 
was by the ears, poor people were unmercifully 
fleeced, and shrewd ones grew enormously rich ; 
and the Jacobites secretly exulted in the hope of 
being able to avail themselves of the prevailing dis- 
content to overthrow the scarcely established revolu- 
tionary government of William and Mary ; when, 
by the joint counsels of two such philosophers as 
Locke and Newton, and two such statesmen as 
Somers and Montague, the government took the 
bold resolution of recoining all the silver of the king- 
dom. An early day was fixed by Parliament, after 
which no clipped money could pass except in pay- 
ments to government, and a later day after which it 
could not pass at all. It was wisely determined that 
the loss on the clipped money should be borne by the 
whole public, and not by the present holders of it ; 
and it was estimated that £1,200,000 would be re- 
quired to make up the currency to the old standard 
of weight and fineness ; and this sum the Bank of 
England, just established, was willing to advance 
on the security of some new and good tax; and the 
window-tax was passed to raise the money ; the old 

16 



242 ELEMENTS OF POLITICAL ECONOMY. 

coins were rapidly drawn in, melted up, and re- 
coined, and thereafter there was no difficulty in 
keeping the circulation full of milled pieces of full 
weight. 

In mixed currencies, the financial law we are now 
treating has a similar, but if possible a more disas- 
trous operation. If the paper in cu'culation be not 
nominally redeemable in gold and silver, then as 
soon as it depreciates below the value of gold and 
silver, as such paper has never yet failed to depreci- 
ate in a short time, it drives the metals completely 
out of the circulation, and keeps them out just so 
long as itself circulates, or until the quantity of such 
paper is so reduced and its character so improved 
that it rises again to a par value with the metals, in 
which case, though it has never to my knowledge 
actually occurred, the metals would come back into 
the currency alongside of the paper. The sudden- 
ness and the thoroughness with which the gold and 
silver will abandon a currency of which a depreci- 
ated, irredeemable paper forms a part, was illustrated 
on a large scale in this country in 1862. A gigantic 
civil war had been in progress in the nation for a 
year ; difficulties and disasters had thickened around 
the path of the government ; its financial embarrass- 
ments were of the most formidable kind ; and yet, 
until April of that year, 1862, the paper money of the 
loyal States, which consisted of about $140,000,000 
of bills of the various State banks, had not much 
depreciated as compared with coin. In January, 
indeed, when the national government had added to 
this mass of paper about |30,000,000 of demand- 
notes, gold was at a premium of five per cent. ; but 



ON MONET. 243 

as soon as the law authorizing the issue of national 
legal-tender notes was passed, the government drew 
in the demand-notes, and for a little interval the 
paper currency was reduced to about $140,000,000, 
and on the first day of April, when the legal-tenders 
were ready for circulation but not yet issued, the 
coin bore a premium of only one per cent. It had 
not yet in any sense abandoned the circulation. The 
State banks had all suspended specie payments on 
the last day of the preceding year, but had not yet 
much expanded their usual circulation. And now 
it is to be noticed that the steady depreciation' of the 
paper currency of the country, both state and national, 
commenced at the very time when the national legal- 
tender notes were thrown into the circulation. All 
the paper was now irredeemable, and its volume was 
now expanded, and the depreciation begun ; it was 
liable to still further expansion, both from the absence 
of restraint on the circulation of the State banks and 
from the urgent necessities of government leading 
to the issue of more legal-tenders, and the deprecia- 
tion continued. In May it was three per cent., June 
nine per cent., July fifteen per cent,, September twen- 
ty-one per cent, October twenty-nine per cent., and 
December thirty-two per cent. Step by step, as the 
volume of the currency increased, did its value de- 
crease as compared with gold ; and what is more to 
the present purpose, no sooner did the depreciation 
become sensible, than the scarcity of coin became 
sensible also, and in a very few weeks' time the 
currency was swept utterly bare of metallic money. 
The silver went first, and then the gold; and a little 
later even the copper cents followed the example ; 



244 ELEMENTS OF POLITICAL ECONOMY. 

and the government was obliged to authorize the 
use of its postage and revenue stamps for small 
change ; and, until it was prohibited by law, cities, 
corporations, and individuals issued shinplasters and 
metal tokens of various kinds to take the place of 
the small coins. This present writing is at the sum- 
mer solstice of 1865, but with the exception of a few 
of the cents, the coins, have not yet returned to the 
circulation, for the sufficient reason that the paper- 
money is still depreciated as compared with them. 
The war is over, peace has returned, business is re- 
viving, and a career of unprecedented prosperity is 
opening up before the country, but the coins have 
not come back, and, under the commonest principles 
of human nature, cannot come back, until the paper 
dollar of the country is equal in purchasing-power to 
the gold dollar, and is redeemable in that. Since 
April 1st, 1862, the paper money has varied from 
par to one hundred and eighty-five below par, and is 
to-day about forty per cent, below par. The whole 
body of the paper money now in the country at large 
cannot fall much short of $1,000,000,000, of which 
about $700,000,000 are in national legal-tender and 
fractional money, and the rest about equally divided 
between the bills of the new national banks and the 
bills, now being retired, of the old State banks. 

So long as the paper money of a country is nomi- 
nally redeemable in gold and silver, the operation of 
the law we have in hand is somewhat peculiar. In 
times of ordinary confidence and prosperity the paper 
and the coin circulate indifferently together, and an 
undue increase of the paper beyond the just demands 
of business does not indicate itself in a premium on 



ON MONEY. 24.3 

the coin, but the whole circulation, gold and paper, 
goes down together, and the depreciation is of course 
indicated in a general rise of prices. There is noth- 
ing anomalous in this, for increase of supply, other 
things as before, always lowers the value of any- 
thing ; and the direct interest of the parties who 
furnish the paper leads them to increase their circu- 
lation as much as they fairly, and sometimes as 
much as they unfairly, can. But a market in which 
prices are high and gold is still circulating is a good 
market to sell in, and increased importations never 
fail to accompany a rise of prices caused by the de- 
preciation of a mixed currency. In the home market 
the paper is still as good as gold, but to pay the 
balances in a foreign trade it is good for nothing. 
The natural superiority of the gold to paper appears 
as soon as a payment is to be made abroad. In 
obedience to this impulse gold naturally and inevita- 
bly goes abroad ; and it has repeatedly gone abroad 
under these circumstances from the United States to 
such an extent that the parties who furnished the 
paper, that is to say, the banks, could no longisr re- 
deem their paper in coin, but were obliged to suspend 
specie payments, which is a euphonious circumlocu- 
tion to express going into temporary or permanent 
bankruptcy. In this case also, though less directly, 
the inferior money pushes the superior out of circu- 
lation. I have no hesitation in calling the paper the 
inferior money, both for other potent reasons soon to 
be specified, and because at any rate it is powerless 
in international exchanges. There is believed to be 
nothing in the monetary history of the United States, 
as there is certainly nothing in the known principles 



246 ELEMENTS OF POLITICAL ECONOMY. 

of human nature, which does not abundantly con- 
firm as a universal truth the proposition in hand, 
namely, that worse and better money being in the 
currency together, the worse will expel the better 
sooner or later; sometimes into hoards, sometimes 
into the melting-pot, and sometimes out of the 
country. 

5. A paper money is only tolerable when it is actu- 
ally and instantly convertible on demand into gold and 
silver. 

I lay down this proposition, and shall attempt to 
prove it, well aware that it is directly opposed to the 
views of the late and able writers on money, Mr. 
Carey and Mr. Moran. I differ with such a man as 
Mr. Carey, to whom I have already acknowledged 
my obligations, with regret ; but I cannot help op- 
posing, to the extent of my ability, his doctrines on 
money and on foreign trade, because, after thoroughly 
canvassing them, I am persuaded that they are fun- 
damentally and perniciously erroneous. Both these 
writers, Mr. Moran more distinctly, advocate a paper 
money based simply on the credit of the issuers ; 
they advocate the principle that the manufacture of 
money should be as free ^s the manufacture of coats ; 
that every man, or association of men, so choosing, 
should open what they call a money-shop to supply 
the community with money; and that no public reg- 
ulation of the quantity or quality of such money 
should be attempted or desired. In developing the 
present proposition some reasons will appear for dis- 
senting totally from these views. 

It is here necessary to anticipate the discussions of 
a subsequent chapter so far as to define Credit as the 



ON MONET. 247 

sale of a service for which the return is not yet re- 
ceived, but only promised. In an exchange proper, 
two services are reciprocally rendered by two persons, 
and the transaction is then and there terminated; 
but in simple credit, one service is rendered, and the 
return service is delayed, and usually some paper 
evidence that such service is due springs up in con- 
nection with the transaction. It is an exchange 
begun, but not yet consummated, and no matter 
through how many hands the paper evidence may 
pass, it is nothing but an obligation resting on some- 
body to pay to somebody the return for a service 
which has been actually rendered. Now the grand 
distinction, and one of the utmost importance, be- 
tween gold and silver money and paper money is, 
that paper money always has in it the element of 
credit, while the other has in it no element of credit 
at all. A gold eagle is not a sign of anything, it is 
not the representative of anything ; it stands in its 
own right, just as a bushel of wheat does ; it is true 
that its only use as money is to purchase other things, 
but its purchasing-power is within a trifle as great 
whether it be in the form of money or bullion ; and 
therefore a service that is paid for in specie closes 
up the transaction completely, the exchange is con- 
summated, there is no element of delay, of promise, 
of credit in such an exchange. It is just as when 
the miller renders a bushel of corn to his neighbor, 
and that neighbor renders him a day's labor in re- 
turn. In both cases, there is an end. But paper 
money is credit-money. It may be more convenient 
than real money ; its value, that is to say, its pur- 
chasing-power, may be equal to that of real money; 



248 ELEMENTS OF POLITICAL ECONOMY. 

it may even in some circumstances bear a premiuni 
over real money ; but all this does not alter the fact 
that there is in it an unlucky element, an unstable 
element, an element which, as men are, is liable to 
some suspicion, the element, namely, of a present 
promise to be fulfilled in future. Paper money walks 
by faith, and not by sight. It is the sign, and not the 
thing signified. It is the representative of something, 
and not that something itself. It is a promise to 
pay, and not the pay itself. It is a credit, and not a 
service. And what makes this very certain is, that 
all paper money knows it to be true about itself. It 
bears this truth stamped on its very face. It does not 
even profess to stand on its own bottom, but leans 
consciously and conspicuously on some solid support. 
The French assignats promised to redeem themselves 
in land ; the continental bills of the old American 
Congress were all to be paid in Spanish milled dol- 
lars ; an $100 note of the late so-called " Confeder- 
ate States of America," now lying before me, speaks 
complacently of a redemption to take place "two 
years after the ratification of a treaty of peace with 
the United States of America " ; the bills of the Bank 
of England profess to be, and are, redeemable in gold 
and silver; the present irredeemable legal-tender notes 
of the United States are all fundable in a six per 
cent, government stock, of which the interest and 
principal are payable in coin ; and the bank bills of 
the country, both state and national, are nominally 
or actually convertible into specie. 

Since, then, the various forms of paper money, 
even the best of them, are mere promises to pay on 
demand, it must be conceded that they are credit- 



ON MONET. 249 

money ; and the question is narrowed down to this, 
whether the functions of money can be well per- 
formed by the evidences of an obligation to pay for 
services already received. It is not denied that such 
evidences frequently have value, that thek value is 
sometimes equal and sometimes superior to an equiv- 
alent sum in gold ; the question is whether in their 
nature they can constitute a good money. In re- 
solving this question, it must be noticed, that the 
fact of indebtedness is not of itself an evidence of 
an ability to pay : individuals, corporations, and gov- 
ernments have often become bankrupt through the 
disproportion of indebtedness to ability. It must be 
noticed, also, that, in the light of human nature and 
experience, men in all capacities are more or less 
willing to accept the services of others without ren- 
dering the equivalent return, even when their obliga- 
tion to render it be certified on paper ; also that the 
willingness of people to accept, in return for actual 
services rendered, mere promises to pay in future, by 
whomsoever issued, is quite different at different times 
— in times of confidence and prosperity they may be 
readily accepted, in times of disaster and peril all 
men prefer payment to promise. The functions of 
money are two : to serve as a medium of exchange, 
and to serve as a measure of value. To fulfil the 
first office well, money should be a commodity at all 
times acceptable to all men in return for services ren- 
dered ; to perform the second function well, money 
should be as uniform as possible in quality, and vary 
in quantity according to the shifting demands of ex- 
change, and not otherwise ; in short, vary in quantity 
just as a good metallic currency does vary under 



250 ELEMENTS OF POLITICAL ECONOMY. 

natural laws alone. But credit-money is unfitted 
by its very nature to do well these two things ; first, 
because it never has been, and in the nature of things 
never can be, acceptable to all men at all times in 
exchange for services even within the country itself, 
and in international exchanges it is not acceptable 
at ail ; and second, because, as has been ah*eady 
shown, a steady measure of value necessitates a 
steady value of the money, and the value of credit 
must certainly be as variable as the character of the 
issuers for integrity and solvency. Add to this, that 
the value of credit-money, like the value of every- 
thing else, depends in part on the supply, and the 
supply will vary with the varying disposition of the 
people to accept it, and thus the measure of value 
will be varied. It is in vain to talk, as Mr. Moran 
does in this connection, of the self-interest of the 
issuers, and of their honor, and so on; self interest 
should keep men from becoming bankrupts, yet men 
do become bankrupt; honor forbids indeed the es- 
caping from a debt, yet debts are escaped from. On 
principles merely, it would be as certain beforehand 
as any such truth can be, that credit-money, from 
the nature of credit, could not properly perform the 
two delicate and important functions of money. 

But we are not left to principles alone. Experi- 
ence throws a flood of light on this whole subject. 
At the beginning of the last century, under the aus- 
pices of John Law, France issued a paper money 
guaranteed by the State, resting back for its value 
on the national faith and on the whole national 
property. The notes were made receivable in taxes, 
were redeemable in coin, were made a legal tender, 



ON MONEY. 251 

were nursed up by the government in every way; 
but in less than four years, owing mainly to their 
over-issue, to which credit-money, unless under the 
most stringent regulations, is always liable, they fell, 
as compared with specie, first to ninety, then to sixty 
and fifty, and shortly after, although they were made 
fundable in annuities, to twenty, and then to four 
per cent., and then their value vanished entirely. 
The notes depreciated at first because the people 
began to lose faith in the ability of the royal bank 
to redeem them in coin ; and the subsequent action 
of the government confirmed then* suspicions; and 
however good the public faith may have been, and 
it was suflicient to rescue most of the notes by fund- 
ing them in annuities, it was a poor element in the 
people's money, because the functions of money are 
such as to be incompatible with any degree of dis- 
trust. It is well, in most cases, for a people to trust 
their government ; it is safe for them usually to loan 
their money to it and take a government bond as 
security for payment; but money is very different in 
its nature from government stocks; and the public 
faith, which is an ample basis for the latter, is no 
suitable basis at all for the former. Again at the 
close of the century France tested the merits of 
paper money on a broad scale. As the great revo- 
lution went forward, and a scarcity of money was 
experienced, the government issued, under the name 
of " assignats," a paper money entitling the bearer 
to a certain value of the property of the royalist 
clergy and nobility, who had mostly left the country, 
and which the government had confiscated and now 
intended to sell. The assignats were receivable in 



252 ELEMENTS OF POLITICAL ECONOMY. 

payment for these landed estates at any public sale 
of the same. For about two years their value kept 
up above ninety per cent., and then began to droop. 
The government, in alarm, while issuing on the one 
hand enormous quantities of the paper to meet the 
vast expenses of the Revolution, which quantities 
were swelled by skilful counterfeiters in the prisons 
and elsewhere, took strong measures on the other 
to prop up their market-value : the use of coin was 
prohibited ; a maximum price in assignats for every- 
thing was established by law ; heavy penalties and 
at last death were decreed against those who refused 
to receive them at par ; but it was all in vain. Down 
they went, says Carlyle, " with an alacrity beyond 
parallel." The discount increased with the issues, 
but in a greater ratio ; by means of a forced loan, 
exacted in 1793, the Convention were enabled to 
draw in eight hundred and forty millions francs of 
the paper, and the depreciation was stopped for a 
little by this expedient; but in the next year the 
amount was as great as ever, and the discount 
greater. In 1795 they could be had for eighteen per 
cent., and in the beginning of 1796 they became 
utterly worthless as money. The government then 
offered to redeem them at thirty for one in " man- 
dats," which entitled the bearer to take immediate 
possession, at their estimated value, of any of the 
lands pledged by the assignats. The mandats de- 
preciated instantly, and in the course of a few 
months were all called in, and business, which had 
practically ceased under the paper money, began to 
revive again at the sight of the coin, which, of course, 
had been out of the circulation for years. The dis- 



ON MONEY. 253 

tress and consternation into which a country falls 
when its measure of value is disturbed and destroyed, 
as it was by the issue of the assignats, is past all 
powers of description. There can be no doubt that 
the depreciation and final worthlessness of the assig- 
nats caused more suffering in the French Revolu- 
tion, a hundredfold, than the prisons and the guillo- 
tine. It may be said that the government ought not 
to have issued them in such excess — over fifty thou- 
sand millions of francs were put out in all. Perhaps 
it ought not. But there never has been a govern- 
ment yet, of the many which have issued irredeem- 
able paper, which had the wisdom and firmness to 
resist for any great length of time the strong temp- 
tation to over-issue. There is no stopping when 
once the issue is begun. The first batch of such 
paper usually banishes the coin from the currency. 
There is no way to entice it back except to call in and 
burn up the paper. Revolutionary governments are 
not generally in position to be able to do this. Ordi- 
nary national expedients are denied them. They can- 
not borrow. Therefore they have recourse to credit- 
money, which is really borrowing without interest, 
and when once the press is set at work it must work 
on with livelier speed, because just in the ratio of 
the depreciation is a greater amount required to 
meet the ordinary payments. This example is sig- 
nificant, because it shows the powerlessness of even 
the strongest and most unscrupulous governments 
to regulate the value of anything. The assignats 
were depreciating during the very months in which 
Robespierre and the Committee of Public Safety were 
wielding the power of life and death in France with 



254 ELEMENTS OF POLITICAL ECONOMY. 

terrific energy. They did their utmost to stop the 
sinking of the revolutionary paper. But value knows 
its own laws, and follows them, in spite of decrees and 
penalties This example also exhibits well the fun- 
damental vice of all credit-money, whose value arises 
just as all other value arises, and is amenable to the 
same law of supply and demand as other values, 
and the vice of which is that there is no natural 
Limitation of its supply. There is relatively no ob- 
stacle to its indefinite increase ; and therefore the 
value dependent on such conditions of supply has 
no sufficient stability ; and therefore credit-money is 
necessarily, and by demonstration, inferior to gold 
and silver money in the cardinal point of a steady 
value. 

The financial experience of the United States is 
so varied and so instructive that we shall devote the 
next chapter to a consideration of its history ; but it 
is here in order to call attention to the fact that the 
bills of credit emitted by the individual colonies 
before the E-evolution, and the continental money 
issued by the old Congress had a course and issue 
almost precisely similar to that of the assignats. 
The continental bills were at first willingly received 
at par. As their volume increased their value dimin- 
ished, as was shown, as usual, by a universal rise of 
prices. The laws of the States continued to make 
these bills a legal tender when they had fallen to a 
tenth, a twentieth, and even a fortieth of their nom- 
inal value, thus sanctioning virtual frauds in private 
business, and making the burden of the money fall 
heaviest on the ignorant and helpless. At length, 
after $200,000,000 had been issued, from which the 



ON MONEY. 255 

government had realized perhaps about $70,000,000 
of specie value, $88,000,000 of the bills were received 
back by the government and replaced at the rate of 
forty for one in bills of the " new tenor " which bore 
interest at six per cent. ; $40,000,000 were in the na- 
tional treasury, having been received in the form of 
taxes, but could not be paid out again because the 
money was now universally rejected ; $70,000,000, 
or more, were still outstanding, a part of it in the 
State treasuries, and a part in the hands of individ- 
uals. These were never redeemed in any sense. 
The bills of the new tenor also depreciated greatly, 
notwithstanding they bore interest ; so that the whole 
loss to the people from the continental money was 
just about $70,000,000 specie, which may be con- 
sidered in the light of a forced loan to government, 
and as the government used it to further the inter- 
ests of the people, it would not seem so bad, except 
under the view that, in running this career of depre- 
ciation and repudiation, many times that amount of 
damage was done to individuals, since the same de- 
preciated dollar so long as it was legal tender paid 
debts over and over again. It would have caused 
less loss and disturbance of contracts if Congress 
had just taken by force $70,000,000 of specie value 
from the pockets of the people. This example shows 
also in a clear light how unfit for the uses of cur- 
rency is a national inconvertible paper. 

The United States legal-tender notes, which be- 
gan to be issued April 1st, 1862, and of which over 
$650,000,000 are now in circulation, have been more 
or less depreciated from the first, and at times very 
much depreciated; and this, not because there has 



256 ELEMENTS OF POLITICAL ECONOMY. 

been doubt about their ultimate redemption, not be- 
cause of a lack of confidence in the stabilitj'' of the 
government, for thousands of millions have been 
freely loaned by the people to the government on 
the public faith in the interval, but partly on account 
of their excessive quantity, and partly on account of 
the nature of credit-money unfitting it to maintain a 
high and steady value. It has been sometimes sup- 
posed that when two kinds of money are both made 
a legal tender, they will both circulate indifferently 
in the currency, and that their value will be equal. 
It is an utter mistake. Gold has been legal tender 
in this country all the while, and yet has borne a 
premium over the other legal-tender money of nearly 
one hundred per cent, on the average of the past 
three years. It may be questioned whether the 
making these notes a legal tender has tended to 
appreciate their value at all ; so far as the demand 
for them was thereby increased it had such a ten- 
dency, but so far as the making them legal tender 
indicated the conviction of the government that they 
were not in themselves equal to gold in value, the 
tendency was the reverse. The faith of the people 
in their money is very properly more sensitive and 
more easily shaken than their faith in anything else ; 
and this is one of several weighty reasons why the 
element of credit" should not enter into the money 
at all. Credit is good in its place, but in the peo- 
ple's current money it is out of place. The fact 
that in the Eastern and Middle States the national 
legal tenders have had no more acceptance in the 
circulation than the bills of their State banks, which 
have been irredeemable since the beginning of 1862, 



ON MONEY. 257 

and not like the others fundable in a gold-bearing 
government bond, is also an indication that the fact 
of their being a legal tender has not substantially 
enhanced their value. 

Our proposition, however, if correct, condemns 
the money of these State banlis also, and, in a gen- 
eral way, all the paper money which has had cur- 
rency in this country from the beginning. This 
paper, although nominally redeemable in coin, has 
never as a whole been actually so redeemable. Some 
of it has been better than the rest, but none of it has 
deserved the praise of being a satisfactory and suffi- 
cient money. (1.) It has been liable to gi-eat and 
sudden contractions and expansions of volume. For 
example, in 1857 the bank circulation of the country 
was $214,778,822, and in 1858 $155,208,344, a con- 
traction of $59,570,474 in one year. In 1862 the 
paper money of the banks was $183,762,079, and in 
1863 $238,677,218, an expansion of $54,885,139 in 
one year. (2.) The ratio of paper to the specie re^ 
served for redeeming it has been a high ratio. 
According to the Finance Report of 1863, from which 
the figures in this paragraph are all taken, that ratio 
for the whole country taken together on the first of 
January, 1863, was 4 to 1 ; while in particular States 
the ratio was remarkable ; in Rhode Island, for in- 
stance, more than 12 to 1, and in Vermont more 
than 28 to 1. It is evident that such paper can only 
be called redeemable by stretch of courtesy. (3.) 
Consequently nothing could prevent a distrust of 
such paper, so soon as there began to be commercial 
stress and pressure ; especially whenever the exigen- 
cies of commerce withdrew gold for foreign trade 
17 



258 ELEMENTS OF POLITICAL ECONOMY. 

from reserves already so small. Four or five times 
have panics resulting from these natural causes 
attacked the paper currency of the country, and 
compelled all the banks to confess, what everybody 
knew before, that they were unable to redeem their 
promises. These repeated suspensions of specie pay- 
ments proclaim the whole system to be unsound. 
They show that credit is no proper basis on which 
to build a currency. The banks, each under its own 
board of control, and under various and often con- 
flicting State laws, have not acted in unison, have 
contracted and expanded their circulation according 
to a view of their own interest, have contributed 
powerfully in times of quiet by a system of generous 
loaning, on which their profits depended, to induce a 
spirit of speculation and a willingness to contract 
debts, and have experienced when the reaction came 
how much easier it is to loan paper promises than 
to fulfil them. Their inability to continue in troub- 
lous times the free loans which helped to bring them 
on, and their repeated failures to make good the obli- 
gation to redeem their own notes, have caused in the 
last fifty years innumerable failures of business men, 
and incalculable losses of property. There can be 
no hesitation in affirming that the expense of main- 
taining a gold and silver currency for all the wants 
of the whole country might have been met many 
times over from the losses resulting from the bank- 
paper system. The instability of the system has 
tended towards a reckless way of doing business 
among us, which has been a just reproach to us in 
foreign countries. Besides these considerations, 
which go to show the inadequacy of bank-paper 



ON MONEY. 259 

money to answer the purposes of a good currency, 
the system is based on essential injustice. It allows 
certain corporations to borrow money of the people 
without paying interest, while other corporations and 
individuals, just as solvent, must pay interest. Bank- 
bills are nothing but promissory-notes which the 
people take of the issuers without interest, giving 
them as security for their return notes which are on 
interest. The greater currency of the bank-notes is 
supposed to be an equivalent for the difference of 
interest, and by this difference of interest the bank 
lives, but it has been found in the long run that the 
paper credit of banks as a whole, and as they have 
been administered, is scarcely better than the credit- 
paper of other corporations and individuals. Their 
money has never been actually and instantly redeem- 
able in coin ; and it is fortunate that the people have 
come to the practical conclusion no longer to allow 
joint-stock companies under State regulations to 
manufacture and issue their money for them. 

But will the National-banking system, just now 
coming into full operation, furnish the people with a 
good currency ? To this question I answer, that the 
National-banking system is every way preferable to 
the old State-bank system. The banks under it are 
all amenable to a central authority and to common 
regulations. Their circulation is all secured by an 
actual deposit with the national Comptroller of the 
Currency, of gold-bearing government stocks to an 
amount at least one tenth greater than such circula- 
tion, so that the redemption of the circulation is 
perfectly provided for, in case the bank itself refuses 
to redeem. The bills of all the banks are current 



260 ELEMENTS OF POLITICAL ECONOMY. 

everywhere within the country, and provision is made 
for the immediate redemption of them in each of the 
great central cities, as well as at the counters of the 
banks which issue them. The bills are so expensively 
engraved by the national government that the coun- 
terfeiting them will be more difficult than it has been 
to counterfeit the State-bank bills. If any form of 
credit-money can be regarded with favor, certainly 
this money can be so regarded, for the capital stock 
of these banks is all invested in the national debt, 
which is as secure a form of credit as any credit can 
be, and the bills are based also on the good faith of 
the individual banks which enlist the self-interest and 
the sense of honor of the stockholders and directors. 
As a form of credit nothing can be alleged against it ; 
it has all the securities and guaranties that could be 
desired ; when specie payments are resumed, as it is 
expected they will be in a year or two, no doubt the 
bills will be practically convertible into gold and 
silver, and so will be, in accordance with the words 
of the proposition, a tolerable moriey. Nevertheless, 
they will not be the most economical nor the best 
attainable money. If we could be assured that the 
$300,000,000 of this money already authorized would 
not be increased, then a good degree of -confidence 
in it would be natural and reasonable ; 'then the lar- 
ger half of our whole currency would be gold and 
silver ; the paper, like the bills of the Bank of Eng- 
land, would undoubtedly be at par all the while, and 
we should gain something by the superior conven- 
ience of the paper, and not lose much by its inferior 
steadiness. But the mischief of it is, this money 
cannot regulate its own quantity ; it is not guarded, 



OK MONET. 261 

as gold and silver are, by a natural limitation of sup- 
ply; a simple vote of Congress would be sufficient 
to double or treble its quantity, and thus derange its 
value, and postpone indefinitely its par with gold. 
After all that can be said in favor of it, it is credit- 
money still, and exposed to the dangers inseparable 
from credit-money, namely, the distrust of the people, 
the undue enlargement and sudden diminution of 
its volume, a consequent unsteadiness of value, and 
inconvertibility. I have but little doubt that Con- 
gress will be urged to enlarge the sum already au- 
thorized, and hardly less that they will lack the wis- 
dom and firmness to refuse, and if we are to have a 
national paper currency expanding and contracting 
under the successive tinkerings of Congress, we shall 
yet experience more of those evils of credit-money, 
from which we have suffered in the past so exten- 
sively in property and reputation, and which nothing 
but our exuberant and exulting strength has enabled 
us to outlive and to forget. 

The Bank of England stands in most men's minds 
as a synonym of security, and its bills as the perfec- 
tion of paper money ; but, like all other human insti- 
tutions, it has had its ups and downs, and there have 
been repeated and persistent "runs" upon it for 
payment, and its paper has been at times discred- 
ited as much as twenty-five per cent. A child of 
the English Revolution, it was incorporated by Par- 
liament in 1694, on condition that its stockhold- 
ers should loan to government, then pressed for 
funds, the sum of ,£1.200,000, on which they were 
promised to receive eight per cent, as interest, and 
£4000 a year for management. It was supposed 



262 ELEMENTS OF POLITICAL ECONOMY. 

that subscriptions to the loan would come in slowly; 
but, to the surprise of everybody, £300,000 were 
subscribed the first day ; £300,000 more in the next 
two days; and in ten days it was announced that the 
specified sura was raised. Thus the moneyed men 
rallied to the support of government ; and the gov- 
ernment was strengthened in one sense by its own 
very indebtedness ; for it was felt that if James 11. 
should regain the throne, no pound of the loan would 
ever be paid. " So closely," says Macaulay, " was 
the interest of the bank bound up with the interest 
of the government, that the greater the public danger 
the more ready was the bank to come to the rescue." 
Thus the whole capital stock of the bank, just like 
the capital of our new national banks, was invested 
in the national debt ; the interest was to be paid 
from the proceeds of the taxes, and the original loan, 
if ever repaid at all, was also to come from the same 
source. At different times down to 1833, the bank 
advanced to the government various sums on various 
conditions, until, when the charter was renewed for 
the ninth time in that year, the public owed to the 
bank X 11,015,000, and the debt has remained at that 
figure ever since. Instead of eight per cent, which 
was paid on the original loan, the rate has been 
gradually lessened, and the bank now receives but 
three per cent, on the whole debt. The entire capital 
of the bank is at the present time about £14,500,000, 
of which, as we have just seen, a trifle over £11,000,- 
000 is in the permanent public debt of England. In 
1844, when the charter was renewed for the tenth 
time, Sir Robert Peel caused a law to pass Parlia- 
ment the object of which was to lessen the fluctua- 



ON MONEY. 263 

tions in the quantity and value of the money. To 
make the notes in circulation vary in amount and 
value, under the exigencies of trade, just as a metalic 
money would do, was the praiseworthy purpose of 
the prime minister in the new constitution he gave 
to the bank in 1844. The bank is thereby divided 
into two separate departments, the issue depart- 
ment and the loaning department. The latter con- 
ducts its business like any other institution of loan, 
raising and lowering its rate of interest according 
to the state of the market, but usually keeping its 
rate a ti-ifle higher than the market-rate, so as to 
be able to act as a support to private bankers and 
others in case of pressure. The issue department is 
subjected to a well-considered scheme of restraint. 
It is allowed to issue £11,000,000 in notes on the 
basis of the permanent debt which the government 
owes the bank, and £3,000,000 on the other public 
securities which are a part of the capital stock ; but 
beyond this £14,000,000, secured by its permanent 
capital, it must have for every pound in notes issued, 
pound for pound of gold and silver in its coffers. 
The average circulation of notes is about £28,000,- 
000, one half based on specie actually in reserve, 
and the other on the public debt. The bills of the 
bank are legal tender everywhere except at the bank 
itself, where coin must be paid on every bill presented 
for that purpose ; and the bank is also obliged to 
buy, and pay for in notes, all gold bullion and for- 
eign coins offered to it, at the rate of £3 17s. 9d. per 
ounce standard fine ; so that, if the notes depreciate 
as compared with coin, they can at once be changed 
into coin, or if coin depreciates as compared with 



264 ELEMENTS OF POLITICAL ECONOMY. 

notes, it can be changed into notes. The bills of the 
Bank of England, consequently, are a better money 
than the bills of our national banks, which are only 
required to keep on hand in lawful money of the 
United States twenty-five per cent, of their liabilities 
in notes and deposits, because they are more cer- 
tain to be instantly convertible into coin on demand, 
the provision for instant redemption is more Kberal, 
and the constant presence in that currency of a larger 
body of coin than of paper makes everything firmer 
and redemption easier. A stoppage of specie pay- 
ments is possible, but not probable, at the Bank of 
England, under the present constitution of the bank. 
It did however suspend in 1797, and did not resume 
till 1821, during which interval the notes, cautiously 
issued at first, continued at par for nearly three years, 
and then declined gradually down to twenty-five and 
even to forty per cent, discount, from which point 
they gradually rose as the prospect of resumption 
increased, until they came to par, and have remained 
so. The earlier period of the suspension proves this 
important point, that when a government possesses 
the monopoly of issuing paper money, and carefully 
limits the quantity issued, and both receives it and 
pays it out as legal tender, it may keep an inconver- 
tible paper at par, and even, by sufficiently limiting 
its quantity, carry it above par. But this truth does 
not make an inconvertible paper a good moriey, be- 
cause it does not make it a self-regulating money, 
and because no government is wise enough, or ever 
awill be, to issue just enough and no more of such 
HSioney. It is certain too that the present convertible 
money of Great Britain does not in fact vary so per- 



ON MONEY. 265 

fectly in volume and value as a metallic money- 
would do under the impulses of trade ; and twice 
since 1844 the government has allowed the bank to 
violate its charter, and to issue more than .£14,000,- 
000 on securities temporarily; once in 1847 and 
again in 1857. The opportune loan of a million to 
our generous countryman, George Peabody, made by 
consent of the government in violation of the charter 
in the latter year, saved him from otherwise inevita- 
ble failure. It shows that there is something facti- 
tious and unnatural about paper money, when so 
rigid a system of restraint is considered needful to 
prevent disastrous fluctuations in volume and value. 
In my judgment, the most economical, and, taking 
all things into consideration, every way the best 
money, is the gold and silver which God has evi- 
dently designed for that purpose. This position does 
not exclude the freest use of those convenient econ- 
omizing commercial expedients, such^ as bills of 
exchange, drafts, checks, money-orders through the 
post-office, and so on, w^hich are sufficient to prevent 
for the most part all burdensome transfers of coin. 
The public has not yet reflected sufficiently on the 
peculiar functions of money, nor discriminated as it 
should the proper sphere of credit from the proper 
sphere of currency. Let the currency stand securely 
in its own right as value-money, and then the va- 
rious forms of paper credit will safely come in to 
remove all the inconveniences and secure all the 
advantages of a perfectly sound, and everywhere 
acceptable, and a naturally self-regulating money. 
The great objection to this has been the expense of 
maintaining such a currency. If we may trust the 



266 ELEMENTS OF POLITICAL ECONOMY. 

competent director of our national mint, the expense 
would be ^iVo of "the value of the currency per an- 
num ; that is to say, if the currency of the country 
consisted of f 720,000,000, which would certainly be 
enough for the present, it would cost ^300,000 per 
annum to keep it good. Considering the inevitable 
losses which always accompany the derangements 
of the standard of value, and the expenses of en- 
graving, and of detecting, arraigning, and punishing 
counterfeiters of the paper, and the losses from suc- 
cessful counterfeits, and other similar items, it is 
believed that $720,000,000 of paper money, inferior 
as it is for the purpose designed, would cost at least 
as much to keep it good. The best money will cer- 
tainly be found to be the most economical. 

6. Government ought to leave freely to the parties 
concerned the rate of interest to be paid on money 
loaned. 

The law of Moses forbade to the Israelites the 
taking from one another any interest on money 
loaned, but at the same time it allowed them to 
take such interest freely of strangers ; the permis- 
sion in the one case going to show that there is 
nothing in the taking of interest in itself unjust or 
sinful, and the prohibition in the other being readily 
explainable from the general purpose of the munici- 
pal regulations of Moses, which was to found an agri- 
cultural and not a trading commonwealth, in which 
every family was to possess land that could not be 
permanently alienated or sold, in which it was a 
great object to maintain the personal independence 
and equality of these families, in which the law for 
the recovery of debts was very summary and effect- 



ON MONEY. 267 

ive, lessening the risk of losing the principal, and 
which was to be and was sedulously separated in 
its usages from the surrounding nations. It has 
been well understood for a long time that the mu- 
nicipal code of Moses was local and peculiar, not 
necessarily applicable at all to the circumstances of 
other States, and in no sense binding on the con- 
science of legislators; and yet there doubtless sprung 
from the prohibition referred to a prejudice against 
interest, and this prejudice was perhaps deepened 
in the Middle Ages and onwards by the conduct of 
the Jews themselves, who, in addition to their sin 
of persistently growing rich in spite of the endless 
disabilities laid on them by the people of Europe, 
always demanded, in accordance with the permis- 
sion of their great lawgiver, a per cent, of interest 
from those strangers to whom they became money- 
lenders. The Jews were everywhere hated, and con- 
sequently the usury which they practised was hated 
also. The fundamental absurdity of forbidding in 
tradina: communities the takins; of interest on sums 
loaned to a borrower which he was at liberty to use 
for his own profit, deterred the nations from goirtg 
to the length of prohibition, unless it might be in 
the case of the hated Jews. There is a clause of 
Magna Charta, interesting as showing how early the 
children of Abraham became the money-lenders of 
Europe, to the effect that, during the minority of 
any baron, while his lands are in wardship, no debt 
which he owes to the Jews shall bear any interest. 
The prejudice against interest embodied itself in 
what are called usury laws. These, without pro- 
hibiting the taking of interest, prescribe a maximum 



268 ELEMENTS OF POLITICAL ECONOMY. 

rate per cent., which lenders may receive, and an- 
nounce a penalty in case they take more. The pen- 
alty is sometimes the forfeiture of the entire interest, 
and sometimes of the entire debt. 

Usury laws, however, have not sprung wholly from 
the old prejudice that to take interest was a great 
moral wrong, and the greater the more was taken ; 
they sprung also from a false notion which used to 
be pretty general, but which is now at length thor- 
oughly exploded, that governments were competent 
to determine the value of their own money ; and 
there has been, and is still, a curious and harmful 
confusion in respect to this term, the value of money. 
In the only proper sense of the term, the value of 
money means its power of purchasing services in 
general, and the value of money is high when a 
given sum of it will purchase much of general ser- 
vices, and low in the contrary case ; bat, unfortu- 
nately, the terms " high and low value of money " 
have also been used to denote a high or low rate 
of interest on money loaned, which is a very differ- 
ent signification, and a high or low rate of interest 
depend on a very distinct set of causes from those 
which determine a high or low value of money ; 
nevertheless, so long as governments supposed that 
they could regulate the latter, it is perfectly natural: 
that they should also suppose that they could regu- 
late the former ;• and although all intelligent govern- 
ments have given over the idea of being able to 
regulate the value of money, many of them still 
adhere to the idea, equally false as the other, that 
they are able to regulate the loanable value, or the 
rate of interest, at least to prevent any more than 



ON MONEY. 269 

their prescribed maximum rate from being taken. 
Even the national banking law of the United 
States, lately passed at the instance of the excel- 
lent Committee of the Ways and Means, adopts the 
usury laws of the several States, and allows the 
banks to take the rates of interest current and legal 
in those States, although this rate vai'ies between 
the extremes of 5 and 10 per cent., and denounces 
the penalty of forfeiture of the whole debt in case 
they take more. Are such laws needful? Are they 
beneficial? Are they in accordance with sound 
principles, or do they violate them ? Has a govern- 
ment any right, after it has stamped or engraved its 
money, and parted with it to the people in return 
for value received, to say that they into whose hands 
it has rightfully come shall only have so much un- 
der any circumstances as a reward for foregoing the 
use of it themselves that somebody else may have 
the use of it ? 

Let us see precisely the nature of the transaction 
when one man loans money to another. It is a clear 
case of value. The lender does a service to the 
borrower, and for this service justly demands a com- 
pensation. The service is this : The lender might 
himself use tlie money to gratify his own desires. It 
is his money ; he may use it, as he pleases, for his 
own gratification. Or, he may himself employ it 
productively, and, at the end of the period, receive 
back his principal with the customary rate of profit. 
If he surrenders this advantage to the borrower, if 
he passes over to him the right to use this money, 
say, for a year, he practises what we call in Political 
Economy abstinence. For this abstinence he has a 



270 ELEMENTS OF POLITICAL ECONOMY. 

right to claim a reward, precisely as the man has a 
right to claim a reward who foregoes w^orking for 
himself in order to work for me. This reward of 
abstinence is interest. The money-lender foregoes 
an advantage. He performs a service for the bor- 
rower ; and, therefore, the right to interest stands on 
just as unassailable ground as the right to wages. 

The money-lender comes to society exactly as we 
all come, having a valuable service to offer in ex- 
change ; and he is anxious, as we all are, to make 
the best terms he can. So far as I can see, his case 
does not differ, in any respect whatever, from the 
case of all the rest of us. It is a case of pure ex- 
change. Mr. Retired Merchant has money to loan, 
and Mr. Active Manufacturer would like to borrow 
it. The first is too old to work, but he can still prac- 
tise abstinence and get gain. The second knows 
how to turn a nimble penny and make two of it, and 
is willing to give a part of the second penny to the 
man who will lend him the first. These two men, 
then, are in position to render each other a mutual 
service. They want to exchange. Why shouldn't 
they strike their own bargain? Every other two 
men when they exchange services strike their own 
bargain, and nobody thinks of prescribing to them 
the terms. It would be considered a vast imperti-" 
nence if government should prescribe the terms of 
exchange in other cases, — why is it less impertinent 
in this case ? The lender has as good a right to 
make the most of his money as the farmer to make 
the most of his wheat. But the farmer is allowed 
to exchange on the best terms he can make : can 
any good reason be given why the lender should not 



ON MONET. 271 

be allowed to exchange with the borrower on the 
best terms he can make ? 

I am perfectly aware that the national banking 
law does not prescribe terms to private lenders and 
borrowers ; but the States themselves do this, and it 
is with the principle alone that I am now con- 
cerned. The principle is everywhere the same, and 
is nowhere soundly based. All values are variable. 
The loanable value of money varies under exactly 
the same conditions as every other value varies. It 
is determined, as every other value is, by the actual 
exchanges between lenders and borrowers; or, rather, 
by what would be the actual exchanges, if they were 
left free. Now for any government to compel a bor- 
rower to pay six per cent, when he might otherwise 
borrow for five, or a lender to take only seven per 
cent, when his money is worth eight, is a direct vio- 
lation of the rights of property. It is a forcible and 
pernicious interference with the freedom of contracts. 
It is based on the false premise that the loanable 
value of money is uniform, and that government is 
competent to determine what it is. No value is 
uniform. And no government is less to be trusted 
with such a power than one which thinks itself 
competent to exercise it. 

• On principle, then, these are the two considera- 
tions which condemn usury laws. First, it is invidi- 
ous to allow other men, in every department of busi- 
ness, to exchange their services on the best terms 
they can make, without any interference or control, 
and then, without rendering any solid reason for it, 
to deny this privilege to money-lenders, who offer 
just as honorable and useful services to society as 



272 ELESIENTS OF POLITICAL ECONOMY. 

any other class of men. Second, it is a false notion 
altogether, that the loanable value of money is, or 
can be made, uniform ; and, therefore, a rate per 
cent, fixed by the government constantly infringes 
on the rights of property, — on the rights of the bor- 
rowers, if the rate is too high, on the rights of the 
lender, if the rate is too low. But there are two 
other considerations, each, if possible, better than 
these, which condemn all legal rates of interest. 
The first is, that such laws are rarely obeyed, and 
can scarcely be enforced. It is notorious that they 
are a dead letter on the statute-book, unless some 
mean-souled wretch pleads usury, out of spite, or to 
avoid an honest debt. Common sense is outraged 
by a law which requires a man to part with his 
property at less than the actual value ; and when 
common sense is against a law, it stands a slim 
chance of observance. If the legal rate be six, and 
the actual worth be eight, who lends at six ? Not 
the banks. They require deposits of their custom- 
ers, the use of whose money shall make up to them 
the difference between the legal and the actual rate. 
The modes of evasion are various, but they are ade- 
quate. Conscience scarcely speaks at all, for self- 
interest and common sense both pronounce the law 
unjust. Is it possible that the honorable gentlemen 
of the Ways and Means Committee really suppose 
that their banks will loan money at seven per cent. 
at any time, when its actual worth shall be nine per 
cent? Doubtless they might loan at that nominal 
rate, but there will be deposits, or a consideration, 
or an "understanding" in the premises. Why 
then have a law that is sure to be disregarded ? 



ON MONEY. 273 

But usury laws, if they were not disregarded, 
would be even worse in their tendency than they are 
no^v. They aim, I suppose, to aid borrowers, and 
make it easier for them to contract loans. But are 
borrowers, as a class, any more deserving of the fos- 
tering care of government than are lenders ? Even 
if it could make its interference effective, as it can 
not, is there any reason why government, leaving 
these borrowers to make all other bargains, sales, 
and transfers according to their best skill and judg- 
ment, should rush to their rescue only when they 
propose to borrow money ? If they are competent 
to do their other business for themselves, govern- 
ment pays their capacity a poor compliment in 
undertaking to help them in the single matter of 
making loans ; and the borrowers in turn have rea- 
son to pray to be delivered from their friends, since 
they, of all others, would be the men especially in- 
jured, if all the lenders obeyed the usury laws. Sup- 
pose that a borrower is in great need of a loan, and 
that for some reason his credit is now a little weak. 
Many men would be willing to loan him at nine per 
cent., which affords a margin for the extra risk, 
but at seven, which we will suppose the maximum 
allowed by the law, he cannot borrow a dollar, be- 
cause his credit is not quite equal to the best. If, 
therefore, the lenders obey the law, he, and such as 
he, must fail. And because it is unlawful to take 
over seven per cent., he will be obliged to pay those 
who are willing to violate the law ten or twelve, to 
compensate them for the risk and odium of such 
violation, while, under freedom, he could borrow at 
nine. Moreover, if the loanable value of money at 

18 



274 ELEMENTS OF POLITICAL ECONOMY. 

the time be actually nine, while the law only allows 
seven, many men will attempt to use their own cap- 
ital productively, who would otherwise loan it, in 
order to realize the high rate ; and this action of 
theirs still further restricts the loan-market and 
makes it more difficult to borrow. If, then, the 
purpose of government be to aid borrowers, no 
means could be more unskilfully chosen for that 
end than to pass usury laws, since such laws, so 
far as they are obeyed, have necessarily the oppo- 
site tendency ; and even when violated redound to 
the disadvantage of borrowers, so long as the laws 
themselves are popularly regarded as of any legal or 
moral force. 

Governments have shown a noteworthy inconsis- 
tency in this matter, which incidentally proves the 
unsoundness of their whole action. While announc- 
ing pains and penalties to those w^ho take or pay 
more than a given rate, they are careful never to 
bind themselves dow^n to any given rate. Govern- 
ments are always more or less borrowers, and if 
usury laws are necessary in order to help borrowers 
in a pinch, there ought to be a clause in the organic 
law of every country, forbidding the government to 
pay and its lenders to take any more than a certain 
rate per cent. There is no such clause in any 
organic law. Governments wisely follow the nat- 
ural market, and borrow low when they can, and 
pay high when they must. In the last months of 
Mr. Buchanan's administration, the United States 
paid twelve per cent, on a public loan, and could get 
but little at that. Sauce for the goose is sauce for 
the gander, and if usury laws are good for the citi- 



ON MONEY. 275 

' zens, some solid reason ought to be rendered why 
they are not good for the government. The truth is, 
they are not good for either, since natural laws are 
perfectly competent to regulate the rate of interest, 
and do regulate it substantially in spite of a facti- 
tious, impertinent, and mischief-making interference. 
The rate of interest has little to do with the value of 
money, properly so called. It depends on the propor- 
tion between the sums of money ready to be loaned 
in any matket, and the amount wanted at that 
time by good borrow^ers in that market. There is no 
value more constantly variable from day to day, and 
from month to month, than the loanable value of 
money. The natural law that holds the rate of in- 
terest in its grasp is most efficient. Every rise in the 
rate tends to lessen the demand of borrowers, and 
every fall to enhance that demand, and thus every 
rise and fall of interest tends to check itself, and 
while the daily and monthly variations of the rate 
for first-class borrowers are very considerable, the 
general average of the rate by years, especially in 
England, where every vestige of usury laws has 
been swept away, is remarkably uniform. The ex- 
perience of England completely confirms our reason- 
ing, and makes us sure that we are right. Indeed 
the law might just as reasonably say that every 
lender shall receive six per cent, as that no borrower 
shall pay over seven. To say either is to defy com- 
mon sense, and expose law to contempt. Adam 
Smith left the " Wealth of Nations " disfigured by 
the concession that governments might properly 
enough pass usury laws ; but it is gratifying to be 
able to add, that he was convinced of his error in 



276 ELEMENTS OF POLITICAL ECONOMY. 

that by Bentham's book on usury, and fully ac- 
knowledged his conviction in the spirit of a genuine 
lover of truth. We conclude, then, that usury laws 
are needless, since interest, like all other prices, will 
perfectly adjust itself. They are disregarded, since 
lenders will loan or withhold their money according 
to their own keen sense of interest. They are per- 
nicious, since they infringe the rights of property, 
and tend to prevent weak borrowers from having a 
fair chance in the market. 



ON CURRENCY IN THE UNITED STATES. 277 



CHAPTER XL 

ON CURRENCY IN THE UNITED STATES. 

It is not so much a revolution through which we 
have been passing for the past few years, as it is a 
series of revolutions. There has been a political 
revolution, a military revolution, a social revolution 
at the South, and a monetary revolution the country 
over. It is difficult for us, who have all been in the 
current, to realize the rapidity with which as a peo- 
ple we have been borne onwards by all the move- 
ments, and the actual distance from our point of 
departure which we have already reached. The best 
place to watch the river is on the shore. If, for the 
sake of the view, we throw ourselves out in fancy 
from the rush of the stream, and take a fixed posi- 
tion to see how fast we have been moving and how 
far we have come in the matter of national money, 
we shall be struck with a marvelous transformation 
which has been silently and now almost completely 
effected. Unless every providential and political sign 
shall fail, we are to be hereafter one homogeneous 
people, distinct indeed in our States as the billows, 
but one in our Union as the sea ; having one set of 
national rights for all the inhabitants within our 
borders, and having also, and this is the point of 
present consideration, one national money, current 



278 ELEMENTS OF POLITICAL ECONOMY. 

and good everywhere, a sign and seal of national 
unity and of consolidated strength. 

I venture to offer to guide my readers in an attempt 
to trace the steps, State and national, as well the 
earlier as the more recent, which have been made in 
this country to find the way to a healthy, safe, and 
uniform currency. Paper money of almost every 
conceivable variety has been tried at one time and 
another; and the national government for itself, 
between 1836 and 1862, discarded in its own trans- 
actions every kind of paper, both paying out and 
demanding to receive gold and silver money only, 
minting indeed at a small seignorage for all parties 
and in all quantities gold and silver that was brought 
to it, but otherwise leaving the States and the people 
to fabricate and circulate whatever kinds of money 
they might choose. 

From the first establishment of the English colo- 
nies in America, the matter of a suitable exchange- 
medium attracted public attention, and was found to 
be attended with difficulties. The colonists drew all 
their supplies from the mother country, and for a 
long time had but few native products to export in 
return, and consequently there was a constant ten- 
dency in the coin which reached them to flow off 
again to England in payment of these debts. But 
something must be used for the purposes of domestic 
exchange. Tobacco in the southern colonies, and 
corn and cattle in the northern, were employed for a 
long time as a local and legalized currency. 

In 1690 Massachusetts set the first example, which 
was soon imitated all over the country, of issuing 
biUs of credit, a government paper made receivable in 



ox CURRENCY IN THE UNITED STATES. 279 

taxes, and afterwards made legal tender in payment of 
ordinary debts. At first these bills, or treasury-notes, 
were issued, not to furnish a currency, but merely as 
a convenient way of anticipating the taxes, that is, 
to realize them at the beginning of the year, while 
they would be gradually paid in in the course of the 
year. They were, in short, an imitation in all 
respects of the English exchequer-bills. Afterwards, 
a scheme originating in South Carolina came into 
general favor, namely, to open loan-offices for the 
issue of colony-bills, which should furnish at once 
capital for borrowers, and a currency for the people, 
and the interest was to be a source of revenue to the 
colony. 

But in whatever way issued, whether in the way 
of loan to borrowers, or in anticipation of the taxes, 
the essential and inherent vice of such irredeemable 
paper was soon everywhere apparent. There was a 
constant tendency to over-issue, and consequently a 
necessary depreciation. There never was a govern- 
ment yet, of all those which have attempted the issue 
of inconvertible paper, which had prudence and firm- 
ness enough to resist for any great length of time the 
temptation to issue such paper in excess. It always 
has depreciated from that cause, and it probably 
always will. So it was, at any rate, in these colonies 
thus early in our history. The bills of credit were 
issued profusely, and depreciated indefinitely. In 
1748 Massachusetts had found paper money so 
utterly wanting as a measure of value, that she deter- 
mined to abandon it altogether. She redeemed all 
her outstanding bills in cash at the current rate of 
twelve for one. 



280 ELEMENTS OF POLITICAL ECONOMY. 

The demands of the old French war, and the va- 
rious attempts to conquer Canada, led, on the part of 
all the colonies except Massachusetts, to new and 
large issues of bills of credit, which depreciated of 
course. Soon after the conquest of Canada the 
British Parliament passed an act prohibiting to all 
the colonies the issue of bills of credit; but from this 
restraint the Revolution set them free ; and, to pro- 
vide means for the desperate struggle with the mother- 
country, there was no resource but in paper money. 

In April, 1775, Massachusetts, which had disused 
paper money for more than a quarter of a century, 
revived its use by authorizing the issue of colonial 
bills to the amount of ,£100,000, in sums small 
enough to circulate as a currency ; and on the 23d 
of June following the Continental Congress began 
its fiscal operations by voting to emit two millions 
of dollars in continental bills of credit. In July an- 
other million was authorized to be issued, and the 
liability for the three millions was distributed among 
the colonies in the ratio of their supposed number of 
inhabitants ; the bills to be redeemed in four annual 
instalments, to commence at the end of four years. 
In November an additional three millions was or- 
dered, to be apportioned and redeemed like the for- 
mer, only the redemption was to begin at the end of 
eight years. In the following February came four 
millions more, one million of which was in bills of a 
less denomination than one dollar. Eighteen months 
had elapsed, and twenty millions of continental paper 
had been authorized, besides large local issues, espe- 
cially in New England, before any very considerable 
signs of depreciation made their appearance. It soon, 



ON CURRENCY IN THE UNITED STATES. 281 

however, became evident that the only way to stop 
the depreciation would be to stop the issues ; and 
Congress made very persistent but ineffectual at- 
tempts to substitute for further issues a system of 
loans on paper bearing interest. At the same time 
they sought to sustain their failing credit by a reso- 
lution that their bills " ought to pass current in all 
payments, trade, and dealings, and be deemed equal 
in value to the same nominal sums in Spanish dol- 
lars " ; and that all persons refusing to take them 
ought to be considered " enemies of the United 
States," upon whom it was recommended to the 
local authorities to inflict " forfeitures and other pen- 
alties." The States were also advised to make these 
bills a legal tender, to make provision for the redemp- 
tion of the first six millions, to avoid the further 
emission of their own local bills, and to take meas- 
ures to draw in those already out.^ The loan sys- 
tem failing, Congress reluctantly had recourse to the 
press which printed the paper money, and the next 
ten millions increased the depreciation decidedly. 
This issue was authorized in February, 1777, and in 
August came two millions more, in November a 
million, and another million in December, making 
thirty-four millions in all. At the beginning of the 
year the bills were nearly at par, and at its close they 
passed at three or four for one. During the first 
half of the next year twenty-three millions and a 
half were added to the already superabundant mass, 
and the depreciation became alarming. Forty mil- 
lions more were added in the last half of the year, 
and the depreciation at the beginning of 1779 

1 HUdretli's United States, Chap. 35. 



282 ELEMENTS OF POLITICAL ECONOMY. 

amounted in the North to six, in the South to eight 
for one. Before that year was half gone, under the 
influence of large additions, the depreciation reached 
twenty for one. The paper was still lawful tender 
in payment of debts ; and notwithstanding the con- 
fusion of contracts, the universal high prices, the 
sufferings of the poor, and the gains of the artful and 
unscrupulous. Congress felt obliged to give currency 
to the most wretched sophistries, to refer the existing 
depreciation mainly to " want of confidence," and to 
laud the paper as the only kind of money " which 
cannot make to itself wings and fly away! It re- 
mains with us, it will not forsake us, it is always 
ready at hand for the purposes of commerce, and 
every industrious man can find it! " The rest of the 
story is soon told. Before the end of the year, the 
remainder of the two hundred millions, which, in the 
vain hopes of stopping the depreciation, Congress 
had beforehand announced as the limit of the issues, 
was put out, and the press was allowed to rest. The 
value of the money was then about thirty for qne. 
The States were now advised to repeal all laws mak- 
ing the bills a legal tender, and the scheme of the 
"new tenor" was devised, by which the old bills were 
to be drawn in at the rate of forty for one, and funded 
in government bonds bearing interest. This was the 
finishing blow, and the paper soon dropped out of 
circulation altogether. Just before the Revolutionary 
army in camp at Newburgh had combined to refuse 
it, and its circulation was wholly stopped, it ex- 
changed for cash at the rate of one thousand for one. 
The whole country experienced in money matters 
just exactly what rebeldom has lately experienced, 



ON CURREXCY IN THE UNITED STATES. 283 

money going down and prices going up, till at last 
they would n't touch anyhow! A man in New 
England or New York would pay five hundred dol- 
lars for his dinner, and never ask the landlord to 
reduce the bill. I heard the story in my childhood 
of a certain gentleman well known in those parts, 
who stuffed his sulky-box with continental bills and 
then sallied forth to purchase a cow! 

At this juncture the rudiments of a better system 
appeared. For nearly a hundred years the Bank of 
England had been issuing paper payable on demand 
in gold and silver. Alexander Hamilton had been 
a close student of English history and of English 
finance, and he conceived that the same thing might 
be done with advantage in America. In 1780, when 
he was only twenty-three years old, he wrote a letter 
to Robert Morris, a wealthy and influential member 
of the Continental Congress, and afterwards the 
Continental financier, in which, after showing the 
causes of the depreciation of the currency, and the 
necessity of a foreign loan, he furnished a matured 
plan of a bank, by means of which the loan might 
be so applied as to reestablish the public credit and 
become the basis of a redeemable currency. This 
was, as I believe, the first suggestion of a banking 
institution for America. Hamilton's idea was briefly 
this : Public credit there was none ; an established 
government there was none ; the Continental Con- 
gress was exercising the unlimited functions of a 
revolutionary government ; under these circumstances 
the only way to create public credit was to unite 
with it the private interests of moneyed men. Es- 
tablish then a bank which shall be the fiscal agent 



284 ELEMENTS OF POLITICAL ECONOMY. 

of the government; obtain, if possible, a foreign 
loan, and deposit it in cash in the bank ; let half the 
stock of the bank be subscribed by wealthy men, 
who can reasonably look for a fair profit on their 
investment ; let government hold the other half and 
have half the profits ; then let the bank issue bills on 
its cash basis, consisting of the loan, the private sub- 
scriptions, and the product of the Continental taxes 
as they are gradually paid in. Thus the bank, and 
all subscribers to its stock, and all holders of its bills 
would be directly interested to uphold the govern- 
ment and its credit. Community would be equally 
benefited, since it would have a relatively sound 
paper for ordinary commercial purposes. 

Mr. Morris found his duties as Continental finan- 
cier sufficiently embarrassing; and in the fall of 
1781 brought forward a scheme for a national bank, 
partially embodying on a small scale the ideas of 
Hamilton. Congress sanctioned the plan, and the 
Bank of North America, the first bank in this coun- 
try, was established in Philadelphia. Mr. Morris, in 
behalf of the general government, subscribed nearly 
two thirds of the capital stock of $400,000, and nat- 
urally took the entire control of the institution. The 
reason why. individuals subscribed so little is to be 
found in the distrust with which paper money of all 
kinds had come to be regarded. Capitalists did n't 
believe there would be any dividends, and the peo- 
ple were afraid the paper would depreciate in their 
hands. Under these unfavorable circumstances the 
bank went into operation in January, 1782. Every 
effort was made to produce a public sentiment favor- 
able to the credit of the bank, and its biUs were the 



ON CURRENCY IN THE UNITED STATES. 285 

first paper handled by Americans which was con- 
vertible into coin at the pleasure of the holders. 
Being made receivable at the Federal and State treas- 
uries in payment of taxes and duties, and being 
cautiously issued at first, the hills soon came into 
such circulation that the bank was able to declare 
dividends on its stock from twelve to sixteen per 
cent, per annum. Who ever heard of capitalists 
who could resist sixteen per cent ? The bank 
opened its books for new subscriptions, and the 
stock went up without difficulty from ^400,000 to 
$2,000,000. 

We must here dismiss the Bank of North Amer- 
ica, the parent of all our institutions of the kind, 
with the remark that, although it was chartered by 
the old Congress as a national institution, such 
doubts were entertained of the competency of that 
body to incorporate an institution within a State, 
that a charter was soon after procured from the 
legislature of Pennsylvania ; and also, that its con- 
nection with the Continental treasury ceased, on the 
retirement of Mr. Mon-is from the office of financier. 
It continued, however, as a State bank ; and it flour- 
ishes still in a green old age among the banking con- 
cerns of the Quaker City. 

Till Mr. Morris's Bank of North America com- 
menced operations in January, 1782, all the paper 
that had been issued in the country, whether by the 
colonies as such or by the central authority repre- 
sented at first by the revolutionary government and 
afterwards by the confederation, was irredeemable 
paper, and illustrated the universal financial law 
that such paper, unless issued under very favorable 



286 ELEMENTS OF POLITICAL ECONOMY. 

circumstances and strictly limited in quantity, will 
depreciate in spite of everything. The bills of the 
Bank of North America were convertible into gold 
and silver at the pleasure of the holders, and they 
mark, therefore, an epoch in the monetary history of 
the country. Some silver coins had been issued in 
Massachusetts as early as 1652, and continued to be 
struck at the colonial mint for about thirty years, but 
the pieces all bear the dates of 1652 or 1662 ; and 
these pieces, now known and prized as the " old pine- 
tree coinage," were the only public coins of any de- 
scription minted in the country itself until after the 
close of the Revolutionary war. They were shillings, 
sixpences, threepences, and twopences. Both silver 
and copper coins were, however, minted in England 
for the use of the colonies ; and in 1722 a patent 
was issued by George I. to one William Wood to 
make coins for colonial use out of pinchbeck, in pur- 
suance of which he had the conscience to make thir- 
teen bright shillings, or thereabouts, out of a pound 
of brass. It is refreshing to add that the colonists 
had the sense and spirit utterly to reject Wood's 
money. In 1786 actual coinage of copper coins 
took place under State authority, in Vermont, in 
Connecticut, and in New Jersey. The same year 
witnessed the adoption in the old Congi'ess of Jef- 
ferson's plan for a decimal currency, and the estab- 
lishment of a mint under national authority, and 
three hundred tons of Federal copper cents were con- 
tracted to be struck the following year. 

When the government went into operation under 
the present constitution, in 1789, besides the Bank 
of North America, two others had been established, 



ON CURREXCY IN THE UNITED STATES. 287 

the Bank of New York in New York, and the Bank 
of Massachusetts in Boston. These three were all, 
and their circulation was mostly confined to the 
cities in which they were located. Except the cop- 
per cents just spoken of, there was no such thing as 
a national currency, and the new government had 
not sufficient credit to make it practicable to rely on 
the aid of private lenders. Hamilton was now Sec- 
retary of the Treasury. In pursuance of the duty of 
his office, he presented to Congi-ess in December, 
1790, his celebrated report, recommending the estab- 
lishment of a Bank of the United States. In this 
report, which at once gave Hamilton a European 
reputation, two points were specially argued : first, 
that such an institution would afford through its bills 
great facilities to trade and to domestic exchanges ; 
and, second, would furnish the new government a 
convenient paper medium for its monetary transac- 
tions, and be a resource for temporary loans. The 
first point respected the people, the second the gov- 
ernment. 

There can be no doubt, I think, that in the circum- 
stances of that time a national bank was expedient 
and beneficial. There was then no confidence, no 
credit, no currency, and no commercial relations es- 
tablished with foreign nations by which gold and 
silver could flow into the country. As an institution 
of loan, the bank gave credit to the extent of its 
means to all who had good security to offer. As an 
institution of circulation, it furnished a convenient, 
a convertible, and a national money. As a govern- 
mental fiscal agent, government could borrow of it 
on an emergency, and pay at its leisure from the 



288 ELEJIENTS OF POLITICAL ECONOMY. 

proceeds of the imposts and taxes. The fullest ac- 
knowledgment, however, of the benefits of such an 
institution at that time does not at all commit one 
to the defence of any such institution now. Cir- 
cumstances have utterly changed. No well-estab- 
lished national government can afford to add to its 
many and higher functions the delicate duty, so 
much more appropriate to private bankers, of loan- 
ing money to the people on interest according to its 
notion of their solvency ; and, in a republic especially, 
where hostile parties alternately administer the gov- 
ernment, loans would be sure to be made for parti- 
san purposes, and corruption find the bank a ready 
tool. 

The constitutionality of Hamilton's plan was 
stoutly denied in Congress. The first-rate abilities 
and growing reputation of that eminent statesman 
had already awakened jealousies both in Congress 
and in the cabinet. Nevertheless, a bill, in substan- 
tial accordance with the views of the Secretary 
passed both houses by large majorities. Washing- 
ton, before signing it, required the written opinion 
of his cabinet on the question of constitutionality. 
Hamilton and Knox took the affirmative; Jefferson 
and Randolph the negative; the President, as usual, 
sided with Hamilton, and signed the bill. 

On New Year's day, 1853, I had the great per- 
sonal pleasure of calling on the widow of Alexan- 
der Hamilton, who survived him just fifty years. 
Turning the conversation on her husband's connec- 
tion with the government, the old lady remarked 
with enthusiasm, — " My husband gave you a bank. 
Jefferson thought we ought not to have any bank, 



ON CURRENCY IN THE UNITED STATES. 289 

and Washington rather thought so, too; but my hus- 
band said we must have a bank ; and one day he 
said to me, ' My dear, you must sit up with me to- 
night, and write for me;' and I sat up all night, and 
I wrote it out with my own hand, and the next 
morning he carried it to Washington, and we had a 
bank!" This last was pronounced not without ex- 
ultation. Fortunate old lady ! The daughter of one 
of the purest and most magnanimous of the Revolu- 
tionary patriots. Gen. Philip Schuyler, and the wife 
of another, peerless among the statesmen of his time; 
who herself lived to see the complete success of the 
work to which her father and husband were among 
the chief contributors. 

With a charter that was to run twenty years, with 
a capital stock of $10,000,000, $8,000,000 of which 
was subscribed by individuals, and $2,000,000 by 
the United States, and the whole of which was sub- 
scribed, with a surplus, within a few hours, the first 
United States Bank went into operation at Phila- 
delphia, in July, 1791. Notice this feature of the 
stock. Hamilton had just before persuaded Con- 
gress to assume the State debts incurred in the war 
of the Revolution, and to fund them, together with 
the certificates of the public debt, into one new and 
compact debt. Three fourths of the subscription of 
individuals to the bank stock must be in these new 
government stocks which bore six per cent. The 
demand for them, thus created, brought them in- 
stantly up to par ; so that the bank was made a 
means, incidentally, of establishing the credit of the 
United States, — all its paper was now at par. This 
splendid success of Hamilton's financial schemes, 

19 



290 ELEMENTS OF POLITICAL ECONOMY. 

together with the unexpected income from the new 
tariff, accounts in part for the immense popularity 
of the man; and justifies the strong expression of 
Daniel Webster, who said, on one occasion, that 
Alexander Hamilton raised the public credit of the 
United States from the dead. 

During twenty years, the term of its charter, the 
operation of the first United States Bank appears 
to have been healthful and beneficent. It furnished 
a paper money secured by government stocks and 
by cash that was current at a uniform value all over 
the country ; its loans, under the circumstances of 
the time, gave a sharp spur to industry and com- 
merce ; while its dividends to stockholders never fell 
below eight, and frequently rose to ten per cent. It 
is not to be wondered at, therefore, that as the time 
approached for the charter to expire, the stockhold- 
ers were anxious for a renewal. They applied for 
such renewal, offering to pay the government a mill-~ 
ion and a quarter for the privilege of continuance. 
It was alleged against the bank, on the other hand, 
that. the stock was now largely owned by foreigners, 
which was true ; and that the directors had some- 
times made, or withheld, loans, for party purposes, 
which was doubtful. The real cause of the opposi- 
tion to the renewal of the charter was this : Instead 
of the three State banks in existence when the na- 
tional institution was chartered, there were now 
(1811) eighty-eight State banks, in some of which 
the States as such held stock. These banks and 
their friends supposed that it would be for their 
interest that the national bank should go out of be- 
ing ; that, in that case, they should obtain the cus- 



ON CURRENCY IN THE UNITED STATES. 291 

tody and management of the national funds, und 
furnish the country the currency, which the national 
institution had furnished. The charter was defeated, 
in the House by one vote, and in the Senate by the 
casting vote of the Vice-President, George Clinton. 
The bank was obliged to wind up its affairs. It did 
so speedily and honestly. This was in 1811. 

Undoubtedly the paper of the first national bank 
was very good money, and certainly superior to the 
bills of the new State banks, for the creation of 
which there was a sort of mania in the country so 
soon as it was ascertained that the national institu- 
tion could not be rechartered. Many of these went 
into operation on the strength of little or no bona 
fide capital. They issued their notes freely, and 
the chasm caused by the withdrawal of the national 
circulation was soon filled up, and more too. As a 
necessary consequence, the whole circulating me- 
dium became depreciated, and the currency came 
into dreadful disorder throughout the country. In 
the fall of 1814, there was a general stoppage of all 
the banks in the United States, except those in New 
England. The notes of the New York city banks 
were ten per cent, below par; those of Philadel- 
phia, eighteen ; of Baltimore, twenty ; of Pittsburg, 
twenty-five. All this illustrates the simple financial 
truth, that money is not a commodity of which an 
unlimited quantity can be absorbed by business, but 
is an instrument for a certain specific purpose, — 
namely, to facilitate the exchange of existing com- 
modities and of services all ready to be exchanged, 
and only waiting for the presence of the medium 
to consummate the transfer; and whenever more 



292 ELEMENTS OF POLITICAL ECONOMY. 

than enough for this purpose is put out, whether it 
be specie or paper, the depreciation of the whole 
mass is inevitable ; on the same principles precisely 
as, when the market is permanently overstocked 
with sewing-machines, there will be an inevitable 
decline in their value. Money is good for the pur- 
pose for which it was invented, and useless for any 
other. So are sewing-machines. When more of 
either is offered than enough to serve their respective 
purposes, in the then circumstances of society, de- 
cline in the value of both is a matter of necessity. 
In 1814 there was not only too much money to do 
the work which money was needed at that time to 
do, but, also, much of it was of very inferior quality. 
There was no sufficient genuine value behind the 
paper to support it. 

In this state of things Mr. Dallas, then Secretary 
of the Treasury, recommended to Congress the estab- 
lishment of a new United States Bank, modelled 
after the first, with a charter for twenty years, with a 
capital stock of |35,000,000, the bank to pay the 
government a bonus of a million and a half for the 
privilege of coming into being. It was thought that 
a strong central and national institution, on which 
the State banks, now increased in number to two 
hundred and forty-six, might lean for support, would 
enable them shortly to resume specie payments, and 
to go on thereafter on better principles. The bill 
organizing the bank was engineered through the 
House by John C. Calhoun. It went into operation 
in 1816, just after the close of the last war with 
England, when the reviving enterprise and enlarged 
business of peace seemed to open up before it a 
prosperous career. 



ox CURRENCY IN THE UNITED STATES. 293 

The new bank was not, however, at first, fortunate 
in its management. It pushed its paper into circu- 
lation with reckless eagerness. In the course of one 
month it increased its discounts from three to twenty 
millions, and in nine months its discount line was 
thirty-three millions. The results were what might 
have been expected, — prices universally high, a spirit 
of speculation everywhere rife, and gold leaving the 
country by shiploads. The bank soon fell into 
difficulties, and public opinion turned more or less 
against it. Although under the abler and more 
careful management, first of Langdon Cheves, and 
then of Nicholas Biddle, the bank recovered its sta- 
bility, it never enjoyed quite the same confidence 
and credit as the first bank. 

This was not wholly its own fault ; for in 1829, 
seven years before its charter was to expire, Andrew 
Jackson commenced his famous contest with the 
bank, which he kept up without intermission till the 
charter expired in 1836. Under this presidential and 
consequent congressional fire, the bank can hardly 
be said to have had a fair chance. Andrew Jackson 
had sworn its death by the 'tarnal — his usual oath — 
and Andrew Jackson was not a man to be thwarted. 
In his annual message in 1829, he gave the directors 
fair warning that there would be " constitutional 
difficulties" in the way of their securing any exten- 
sion of their privileges, and in 1832 he vetoed the 
bill to recharter the bank. The next step was to 
remove from the custody and management of the 
bank the public moneys. Three years before the 
charter expired he requested Mr. McLane, the Secre- 
tary of the Treasury, to remove the national funds 



294 ELEMENTS OF POLITICAL ECONOMY. 

from the custody of the bank, and to place them in 
certain selected State banks. Mr. McLane declined 
to order the removal. Whereupon Mr. Duane of 
New York was appointed to the treasury. But Mr. 
Duane, no more than his predecessor, could see his 
way clear to remove the deposits. When made to 
understand that it was the determination of the 
President to have them removed at all hazards, he 
explicitly refused to lend himself for the purpose. 
The President removed Mr. Duane, and appointed 
Roger B. Taney, the late Chief Justice, as Secretary 
of the Treasmy. He proved more flexible to the will 
of power, and immediately gave the required order. 
The consequences of this step in the circumstances 
were immense and mischievous. The discount line 
of the bank was at the moment over $60,000,000. 
The public deposits were $10,000,000. The sudden 
withdrawal of this sum affected credit and disar- 
ranged business to a remarkable degree, and caused 
intense excitement all over the Union. 

The next movement in the " great experiment," as 
it was sarcastically called in the politics of the day, 
was the issue of the famous specie-circular, which 
directed the receivers of the public money to take 
nothing but gold and silver in payment of the public 
lands. Speculators and others had been making 
large purchases of western lands, expecting to pay 
in paper money. The specie-circular came upon 
them like a clap of thunder. Their consternation 
was vast, and the circular, coming as it did, shortly 
after the removal of the deposits, made confusion 
worse confounded. 

General Jackson went out of office, and the second 



ON CUREENCY IN THE UNITED STATES. 295 

bank went out of being the same year ; but the 
inaugurated movement was completed by Mr. Van 
Buren, who effected the complete divorce of the 
government from all banks and fiscal agents what- 
ever, first, by directing the State banks which now 
had the keeping of the public moneys, to distribute 
them as surplus revenue among the States; and, by 
the sub-treasury scheme, in pursuance of which the 
United States received in payment of all dues, and 
paid out in all disbursements, gold and silver only. 
I believe in gold and silver money, or their equiv- 
alent in representative paper which can be instant- 
ly converted into them, and do not question the 
patriotic aims of the administrations concerned, but 
there was something headlong and violent in this 
ti-ansition from the traditional policy of the govern- 
ment to the new system. The successive steps fail 
to commend themselves to impartial men as wise. 
They wrought immense mischiefs at the time, con- 
tributed largely to the terrible financial crisis of 1837, 
and were a leading cause, no doubt, of the defeat of 
Van Buren in 1840, and the triumphant election of 
General Harrison. Such changes ought always to 
be carefully prepared for and gradually introduced. 

From 1836 to 1862 there was no national money 
in the United States, except the coin ; the paper 
currency was furnished by a number, increased at 
last to over fifteen hundred, of joint-stock banking 
companies, under the sole authority of the States. 
These, under various and often conflicting regula- 
tions, manufactured and issued money for the peo- 
ple. This money, as a whole, was never a safe, a 
uniform, an economical currency. It was subject to 



296 ELEMENTS OF POLITICAL ECONOMY. 

alternate contractions and expansions which spoiled 
it as a measure of value. It was never able to stand 
the shock of the commercial crises which it power- 
fully contributed to bring on. Money is an imple- 
ment, and a costly implement, and the functions it 
has to perform cannot be performed by cheap, penny- 
wise, pound - foolish substitutes. Just as no man 
wants in his factory a crazy, second-hand engine, 
whose boiler is liable to burst, and whose gear gets 
out of repair, because it is cheaper, but prefers to get 
a good machine and pay for it, so wise and patriotic 
men are willing to be at the expense of getting a 
good, a national, a respectable, an everyw^here cur- 
rent, and, if it must be paper, an instantly converti- 
ble money. Such a money the country at least ex- 
pects to have under the new national banking law, 
whose origin and principal features we shall examine 
after casting a glance at the mint. 

Two kinds of paper and two kinds of coin had 
preceded the issue of the bills of the first United 
States Bank. The first kind of paper were bills of 
credit issued first by the individual colonies, and then 
by the confederated continent, always inconvertible, 
and consequently always depreciating; the second 
kind of paper were the bills of the three State banks 
at Philadelphia, New York, and Boston, convertible, 
and so far forth excellent ; but circulating mainly in 
their respective cities only. The first kind of coin 
were the pine-tree silver-pieces of Massachusetts, 
minted two hundred years ago, and the copper pieces 
struck under State authority about the time of the 
adoption of the constitution of the United States, 
simultaneously in Vermont, Connecticut, New Jer- 



ON CURRENCY IN THE UNITED STATES. 297 

sey, and Massachusetts ; the other kind of coin being 
the copper cents nationalized by the old Congress, 
and which came into circulation while the conven- 
tion was sitting which framed the constitution under 
which we live. 

As soon as the new government had got fairly 
under way, the more pressing questions of the tariff, 
the national bank, the organization of the depart- 
ments, being disposed of, the national mint was put 
into practical operation at Philadelphia. The laws 
relating to the mint were enacted during the session 
of 1792, and the first Federal coins of gold and silver 
were struck in January, 1795. It is to Jefferson that 
the country is indebted for the decimal scale of cur- 
rency, so superior in convenience to all other mone- 
tary subdivisions. He had proposed a matured plan 
for the coinage, with the dollar for the unit, and the 
decimal subdivisions of dimes, cents, and mills, and 
the decimal multiple of the dollar, the eagle, while 
he was a member of the old Congress in 1785 ; and 
the Congress had adopted his plan the following 
year, and, as has been said, some copper cents were 
minted on the Federal standard ; but nothing more 
was done till 1792, when the new Congress reaffirmed 
the resolutions of the old, readopted Jefferson's de- 
nominations, and put our existing mint into working 
order. There was a curious debate in Congress at 
the time as to the devices which the coins should 
bear. As the bill came from the Senate, where it 
originated, the gold and silver pieces were to have on 
one side the figure of the eagle, which the Continen- 
tal Congress long before had adopted as the national 
emblem, and near this, the legend " United States 



298 ELEMENTS OF POLITICAL ECONOMY. 

of America." This was for the obverse of the coin, 
and so far nobody had any objection. For the re- 
verse, the bill proposed that, in accordance with the 
usages of all nations from the time of the earliest 
known coinage, the impression or representation of 
the head of the President of the United States for 
the time being, together with his name, order of suc- 
cession in the presidency, and the date of the coin- 
age, should be stamped. This was strongly objected 
to in the House, as savoring of monarchy. The 
President's head on the coin was deemed by some a 
dangerous thing for the republic, and the proposal 
led to a sarcastic and even acrimonious debate, and 
was at length defeated in the House by a vote of 
twenty-six to twenty-two, in which the Senate was 
afterwards obliged to concur, and a proposition made 
by Key of Maryland was carried, to substitute a fig- 
ure of Liberty instead of the obnoxious head of the 
President ; but under precisely what sort of a figure 
to represent Liberty was then the difficulty, and at the 
next session Elias Boudinot of New Jersey, after- 
wards the director of the mint, endeavored to get 
substituted for the emblematic figure of Liberty the 
head of Columbus, but in vain ; the Republican party 
was bound that the figure of Liberty and no other 
should go on to the coins, and it went, and we have 
here the history of that daintily seated lady, whose 
pretty face we used to see familiarly enough before 
the war, and whose acquaintance we hope to resume 
in the good time coming. 

It may be asked how we came to have the dollar 
as the unit of our monetary system. The word dol- 
lar is derived from a German word which means 



ON CURRENCY IN THE UNITED STATES. 299 

valley, and was first applied to coins in consequence 
of this circumstance : in the mining region of Bohe- 
mia, at a place called Joachimsthal, (Joachim's val- 
ley,) silver-pieces of one ounce weight were coined 
and came into circulation about 1520 as Joachims- 
thaler, and then for shortness thaler ; this became 
dalera in Spanish, and in English dollar. The thaler 
is still the German money of account, and the Span- 
ish milled dollar became so famous in the world of 
commerce, and so familiar to our fathers in their 
dealings with the West Indies and the Spanish 
American colonies, that our Congress adopted it as 
the best known and most convenient unit of money. 
The word dime is a corruption of the Latin decern, 
ten ; cent a contraction of the Latin centum, hun- 
dred ; and mill a contraction of the Latin mille, thou- 
sand ; so that our denominations are philosophical 
as well as convenient, each one in order being and 
being designated a tenth part of the one above. 

The mint of the United States is one of the most 
interesting institutions in the country. It was estab- 
lished at Philadelphia in 1792, While it was still 
doubtful where the ultimate seat of the national gov- 
ernment would be placed, the citizens of that beau- 
tiful city were strongly in hopes of being able to 
persuade Congress permanently to abide in their 
town, in which the old continental body had first 
met, in which independence had been declared, and 
which, more than any other, was popularly regarded 
as the headquarters of the national Union. A no- 
table instance of log-rolling legislation, the first in 
our history, transferred the capital of the country to 
the banks of the Potomac, but the good people of the 



300 ELEMENTS OF POLITICAL ECONOMY. 

Quaker City have nevertheless always retained the 
mint, as a memorial of their earlier position in the 
history of the government. 

By the law establishing the mint, the chief officer 
was to be styled a director ; and the ingenious David 
Rittenhouse, a self-taught mathematician, who had 
run several years before, by the help of instruments 
all of his own construction, the most difficult part of 
Mason and Dixon's line, was shortly after appointed 
to this post. The act stipulated that all bullion 
brought to the mint should be coined gratuitously ; 
but when coin was delivered in exchange for bullion 
on the spot, one half of one per cent, was to be 
charged as seigniorage. The coins were to be the 
eagle, the half-eagle and the quarter-eagle in gold ; 
the dollar, half-dollar, quarter-dollar, dime, and half- 
dime in silver ; the cent and half-cent in copper. 
The weight of the eagle was to be 270 grains troy, 
alloyed according to the English standard, one part 
in twelve ; and the dollar was to weigh 416 grains, 
alloyed one part in nine and nine-tenths. The sub- 
divisions of these coins, gold and silver, were to be 
in all respects proportional to their units. At that 
time, in France and in Europe generally, the current 
relative value of gold and silver was considered one 
to fifteen, and the act of Congress established that 
as the ratio of the value of the two metals to be 
maintained at the mint; but, from this clause of the 
law, there followed important consequences, which 
were not foreseen, since that was not, at least in 
America, the true ratio of their value at that time, 
and being a decided undervaluation of gold, the gold 
coinage did not come into any circulation. It was 



ON CURRENCY IN THE UNITED STATES. 301 

really worth by the ounce more than fifteen ounces 
of silver ; but, as the mint only reckoned it equal to 
fifteen ounces of silver, it was more valuable out of 
the circulation than in it, and it was therefore always 
exported in preference to silver, in payment of for- 
eign balances, especially after France and the rest of 
Europe had changed the relative legal value to one 
to fifteen and one half. After that, an ounce of gold, 
estimated in silver, was worth three and one third per 
cent, more abroad than at home, and, of course, under 
the circumstances, it would not circulate in the home 
currency. The cheaper money will push out of cir- 
culation the dearer the world over. From the organi- 
zation of the mint till 1817, over five millions and a 
half dollars in gold-pieces were coined, and very little 
indeed of it came into permanent circulation, for the 
simple reason that it was really worth more than it 
was counted to be worth by the regulations of the 
currency. It would, therefore, pay to melt it up, be- 
cause it was worth more as bullion than as coin. 

This state of things continued, the silver circulat- 
ing freely but the gold scarcely circulating at all, till 
the attention of Congress was called to the subject, 
and a law passed substantially rating gold in relation 
to silver at one to sixteen. The weight of the eagle 
was reduced to 258 grains from 270, and the alloy 
increased to one part in ten from one part in twelve. 
This increased at one jump the legal valuation of 
gold Gi'^.fu per cent, as compared with silver, which 
remained as before. As the former ratio was a de- 
cided undervaluation of gold, so the law of 1834 as 
decidedly overvalued it ; and the working of a beau- 
tiful natural law became immediately apparent, by 



802 ELEMENTS OF POLITICAL ECONOMY. 

which the current of the metals was reversed, silver 
now passing in preference to Europe to liquidate the 
balances of trade, and gold coming from Europe to 
the United States, where it was about three and one 
quarter per cent, dearer than in Europe, while silver 
was about three and one quarter per cent, dearer in 
Europe than in the United States. The metals go 
where they have the most consideration in exchange. 
Between 1834 and 1S37 silver was slipping out of 
our currency, and gold as decidedly coming in. The 
law of Congress went too far, and inverted the evil 
it was designed to correct. It endeavored to hit the 
true natural relative value of the two metals for the 
time being, but shot as much beyond the mark as 
the previous law fell short. Our silver coins began 
to be exported freely in preference to gold in pay- 
ment of balances, but the tendency had not become 
very marked when were introduced the changes of 
1837. 

Dr. Robert M. Patterson, who was the director of 
the mint from 1835 to 1851, under whose direction 
the present admirably improved machinery of the 
mints was introduced, and who thereby developed 
their capacity from a coinage of $5,000,000 to $63,- 
000,000 per annum, drew up a new code of mint- 
laws, which was enacted by Congress in January, 
1837, by which the previous complicated legislation 
was all superseded, and on which the mint has been 
substantially administered ever since. In the first 
place, the French standard of fineness of nine tenths 
for both gold and silver was adopted, that is to say, 
one part alloy in a whole of ten parts. Since its 
adoption by us from the French, this decimal stand- 



ON CURRENCY IN THE UNITED STATES. 203 

ard of fineness has been adopted also by several other 
nations for then- new coins, and thus some important 
steps have already been taken towards a most de- 
sirable end which is yet to be realized in the future, 
a universal currency for commerce. If the money of 
the leading commercial nations only contained the 
same quantity of alloy, and especially if the coins 
could be brought into decimal or other easy numeri- 
cal relation to each other, as the French franc, the 
American dollar, and the English sovereign already 
are, this money would be a sort of universal money, 
capable of paying the balances of commerce any- 
where, without the present trouble and expense of 
melting up and recoinage. This change in the stand- 
ard of fineness necessitated a change in the weight 
of the silver coins, if the established relation of one 
to sixteen was to be maintained. Accordingly the 
weight of the silver dollar was reduced from 416 
grains to 412-^^, and the lesser silver pieces in propor- 
tion. The weight of the dollar has remained at that 
figure ever since, but the smaller silver coins have 
been, as we shall see, still further reduced in weight, 
and the refusal of the dollar-piece to circulate has 
been another good illustration for ten or more years 
of the universal law that the cheaper money drives 
our the dearer. 

At different times since 1837 new denominations 
of coins have been added to our national series ; of 
gold, the double-eagle, the three-dollar, and the one- 
dollar piece; of silver, only-the three-cent piece, which 
has never been popular, and will be superseded by 
the new three-cent copper piece. In 1853 very inter- 
esting alterations were made in the character of our 



304 ELEMENTS OF POLITICAL ECONOMY. 

silver coins ; up to that date the laws made both the 
gold and silver money a legal tender to any amount; 
and it was consequently optional with the debtor to 
pay in the cheaper metal, which ever it might be ; 
arid as experience was proving that the relative value 
of the two was not constant but variable, and that 
the legally established ratio of one to sixteen was de- 
pleting the currency of silver, it was then determined 
to make gold alone the legal tender, except to the 
extent of $5 ; to cease coining silver for individuals, 
and only coin on government account such sums as 
seemed to be in demand for purposes of change; and 
to reduce the weight of the half-dollar and its sub- 
divisions so that their nominal value should be con- 
siderably above their real value as compared with 
the silver dollar, and thus their exportation be pre- 
vented. Accordingly the weight of the half-dollar 
has been reduced from 206^ grains to 192 grains, and 
of the smaller coins in proportion. Government buys 
silver bullion at the market price, which has only 
varied for several years from f 1.21 to f 1.22|- per 
ounce, and coins this into $1.25 of the smaller silver- 
pieces, thus charging a seigniorage of about three per 
cent. Consequently the half-dollars and lesser silver 
coins are overvalued in our currency, and a nominal 
dollar's worth of them worth 1-^ per cent, less than 
a silver dollar. The result of these measures has 
been to establish gold as the real currency of the 
country, and to make silver entirely subsidiary to 
that. The current value of the silver coin in the 
currency is sufficiently above its market price as 
bullion to prevent the exportation of the coins, and 
this explains the discount to which our silver has 



ON CURRENCY IN THE UNITED STATES. 305 

been subjected in Canada for the past three years. 
In^ead of weighing 412\ grains, a dollar in small 
coin weighs only 384 grains, and therefore the Cana- 
dians with good reason have vehemently rejected 
these pieces at their nominal value. Their actual 
and proper discount as compared with the silver dol- 
lar is 7]*o^j per cent. It ought to be added that the 
gold dollar is now our unit of value, and the director 
of the mint has repeatedly asked Congress to bring 
the silver dollar out of its anomalous into a normal 
condition. 

It now only remains to characterize the new na- 
tional bank system, in its origin, structure, benefits, 
and dangers. 

When Secretary Chase assumed the Treasury De- 
partment in the spring of 1861, the state of the coun- 
try, and, of consequence, the state of the finances, 
were appalling. Mr. Buchanan's administration had 
just been trying to borrow a few millions of dollars 
of the people, and had only succeeded in securing a 
very small sum, and that at the enormous rate of 
twelve per cent, interest. The clouds of war which 
had been gathering black and sullen all the winter, 
soon broke in wrathful peals over the head of the 
new administration. The country must be defended, 
as well as the ordinary expenses of the government 
met ; an army must be raised, equipped, put into the 
field, and paid. We do not propose to follow the 
Secretary in his general financial embarrassments, 
expedients, and resources ; but it is needful to our 
present purpose to say that, owing to the unexpected 
delays and disasters of the war, and to the conse- 
quent want of confidence in the public mind, he 

20 



306 ELEMENTS OF POLITICAL ECONOMY. 

found it extremely difficult to borrow the sums ne- 
cessary to be had in order to meet the expenditures 
of the government ; and that in his first annual 
report to Congress, in December, 18G1, he recom- 
mended, principally for the sake of facilitating the 
negotiation of loans, the organization of banking 
associations, whose circulation should consist only 
of notes, uniform in character, furnished by the gov- 
ernment, and secured as to convertibility into coin 
by United States bonds deposited in the treasury. 
It is clear that if such associations should be formed, 
it would make a market for the national bonds to 
the extent in which they should invest their capital 
stock in them as security for their circulation. Above 
all things, at that time the United States wanted to 
borrow money. It must borrow or perish ; and 
therefore a national banking system, based for secu- 
rity on the national debt, would open a market for 
some hundreds of millions of the evidences of that 
debt, and put a corresponding sum of immediately 
available funds into the hands of the government. 

This proposal of the Secretary, involving, as it did, 
the winding up of the State banks as such, found at 
first but little favor in Congress or among the people. 
The banking interests of the eastern and middle 
States, particularly of the State of New York, from 
whose State bank system the idea was mainly and 
by acknowledgment borrowed, were especially hostile 
to the scheme. In his second annual report, in 
December, 1862, the Secretary iterated his recom- 
mendation, and enforced it at length by arguments 
drawn from the necessity of effecting immediately 
more extensive loans, from the character of the cur- 



ox CURRENCY IN THE UNITED STATES. 307 

rency for soundness and uniformity thus furnished to 
the people, from the convenient agencies which such 
banks would furnish for the deposit of public moneys, 
and from the firm anchorage which such a system 
would give to the union of the States. These argu- 
ments, which found a response especially emphatic 
from the Western States, coupled with the assurance 
of the Secretary, that, if Congress should concur in 
bis views, though conscious of the great difficulty 
which vast, sudden, and protracted expenditures im- 
posed on him, he thought he should still be able to 
maintain the public credit and provide for the public 
wants, induced Congress to frame and pass " An act 
to provide a national currency secured by a pledge 
of United States stocks, and to provide for the circu- 
lation and redemption thereof." The act was ap- 
proved by the President February 25, 1863. 

The fundamental idea of the whole system is the 
combination of national credit with private capital 
in the issue and redemption of money. This idea 
was first realized in the Bank of England. The 
bank is an association of individuals incorporated 
under the style of the " Governor and Company of 
the Bank of England;" and at its organization in 
1694, it invested its whole capital stock of $6,000,000 
(reducing pounds to dollars) in government bonds ; 
and at various times since it has bought up more of 
these bonds, until now the British government owes 
the bank $55,075,000. This debt is the basis of the 
operations of the bank. It is allowed to issue notes 
to the full amount of this permanent debt, and to 
the extent of $14,925,000 more on other national 
securities, less permanent in their character ; but for 



308 ELEMENTS OF POLITICAL ECONOMY. 

every bank-note beyond this aggregate of $70,000,- 
000, based on the national credit, there must be 
pound for pound gold and silver in the vaults of the 
bank. The bank-note circulation, therefore, is based 
first on the credit of the association of individuals 
called the Bank of England, which promises to re- 
deem every note in specie on presentation, but rests 
back for its ultimate security on the national faith 
embodied in the bonds in which the capital stock 
of the bank is invested. Very similar is our new 
system. Every bank organized under it invests its 
own capital stock in the bonds of the United States, 
bearing interest. These bonds are transferred to an 
officer of the treasury, called the comptroller, at 
Washington, who holds them as security for the 
redemption of the bills of such bank, but who pays 
the interest on them to the bank itself, so long as 
the bank redeems its bills promptly and violates no 
provisions of the organic banking law. Ninety per 
cent, of the amount of such bonds thus deposited 
with the comptroller, provided the bonds be esti- 
mated at par value and bear interest at a rate not 
less than five per cent., is then furnished by the 
treasurer to the bank in circulating notes, engraved 
and registered by the United States ; unless the cap- 
ital stock of the bank be more than $500,000 and 
less than $1,000,000, in which case only eighty per 
cent, of the capital is furnished in notes ; and if the 
capital be between $1,000,000 and $3,000,000, only 
seventy-five per cent.; and over $3,000,000, sixty per 
cent. These notes thus received by the banks, they 
issue to the people in ordinary loans and payments, 
and they are required by the law to keep on hand 



ON" CURRENCY IN THE UNITED STATES. 309 

at all times twenty-five per cent, of their aggregate 
average circulation and deposits in lawful money of 
the United States, with which to redeem their notes 
on presentation. Thus the convertibility of the 
notes is dependent first on the solvency of the as- 
sociation, and, if that fails to redeem them, they 
are speedily redeemable, after certain formalities are 
gone through with, at the treasury of the United 
States; and so many of the bonds belonging to 
such bank, deposited with the comptroller of the 
currency as security for the redemption of the notes, 
are then to be sold as shall reimburse the United 
States for such redemption ; so that it is almost im- 
possible under the law that the bill-holders of any 
national bank can ever suffer any loss. The United 
States holds the capital of the bank in its own 
hands, and is thus enabled to guarantee the con- 
vertibility of the bills. At the same time the system 
secures the manifold advantages of private capital, 
private enterprise, and personal sagacity and integ- 
rity, in the matter of loaning money, securing depos- 
its, and general management of the banks. 

The superiority in every respect of this scheme of 
banking to the fast and loose system which has pre- 
vailed in this country so long, is very apparent. In 
the first place, perfect publicity of the affairs of 
every bank is provided for in the organic law, and 
cannot be evaded. Every bank in the principal 
cities must publish a statement, under oath, at the 
beginning of every month, of its exact condition, 
and forward it to the comptroller; and the other 
banks must do the same every quarter, and the 
comptroller is to publish abstracts of these reports 



310 ELEMENTS OF POLITICAL ECONOMY. 

every quarter ; so that everybody can know the state 
of each bank in particular, as well as the state of 
the whole circulation. In the second place, the 
whole amount of the circulation cannot be increased 
at the will of the banks or the will of the comp- 
troller, or in any other way except by an act of 
Congress authorizing such increase ; so that the sys- 
tem is not so liable to those sudden contractions 
and expansions which have been the bane of our 
paper money hitherto. In the third place, the bills 
will be uniform in value all over the country, and 
debts can be paid by them through the post-office 
or otherwise, without the mediation of any bank or 
the payment of exchanges. In the fourth place, be- 
sides the absolute security of ultimate redemption, 
the ratio of lawful money actually on hand to the 
aggregate circulation is much higher than has hith- 
erto prevailed in practice throughout the country. 
Add to these reasons this other, that the homogene- 
ousness of the money circulating among them, in 
connection with a common creditorship towards the 
United States Government, is an additional bond 
binding the States and the people together, and 
tending powerfully to neutralize the centrifugal 
forces which are always at work in large societies 
and governments. But we shall get an idea too 
favorable to the new national banking system, un- 
less we look also at 

THE DANGERS. 

The money which these banks are to circulate is, 
after all, nothing but credit money, and will be liable 
in some degree to the disorders which are inseparable 



ON CUEEEXCY IN THE UNITED STATES. 311 

from every form of credit. Credit is not payment, 
but a promise to pay. The promise may be good, 
it may be sure to be fulfilled; but it is not, and never 
can be made, the same thing as fulfilment. These 
bills bear upon their face the acknowledgment that 
they are promises to pay, and not the pay itself; and 
men are so constituted, and society is so delicately 
organized, that times are liable to come when men 
shall have a general distrust of mere promises, and 
shall desire to see them changed into fulfilment. If 
a panic should ever arise in regard to these notes, 
and a general desire be manifested on the part of 
the holders to convert them into cash, it is evident 
that many of the banks would be obliged to suspend 
specie payments, since they are only required to 
hold twenty-five per cent, of their circulation and 
deposits in cash, and this ratio, as a general thing, 
is not likely to be exceeded. It is true that their 
notes cannot all come back at once for redemption, 
nor indeed any very considerable proportion of them, 
since, unlike the circulation of the State banks, they 
will pass freely beyond the boundaries of States and 
sections, and become necessarily very widely dif- 
fused ; yet general confidence is a thing so sensitive, 
and credit money is in its nature such, that an abso- 
lute freedom from panics and from supensions can- 
not rationally be predicted. They are liable to 
come : it will be strange if they do not come. 

But the most imminent danger that threatens this 
system is this : that Congress will unwisely increase 
the amount already authorized to be issued before 
the system gets fairly settled and the resumption of 
specie payments takes place. This is every way to 



312 ELEMENTS OF POLITICAL ECONOMY. 

be deprecated. The system will be sound and whole- 
some just in proportion as Congress refuses to add 
to the present amount of $300,000,0000. When the 
war broke out, the whole paper circulation of the 
country, north and south, was only ^202,000,000 ; 
and in the loyal States, $150,000,000 ; and on the 
first of January, 1862, in the loyal States, only 
$130,000,000, according to the authority of Secre- 
tary Chase. Now, we do not want an exclusively 
paper currency. We want a broad substratum of 
gold and silver underneath it to support it, control 
it, and redeem it. There ought to be at least as 
much of gold and silver in the currency and in the 
banks as of paper money. The English have more. 
That is the grand reason why the British currency is 
so sound and excellent; not that a part of it is credit 
money, but that the greater part of it is gold and 
silver. If Congress will only hold firm, and allow 
those channels of circulation which $300,000,000 of 
paper cannot fill to be filled up with gold and silver 
money, as they will be in accordance with natural 
laws, without the necessity of a syllable of legisla- 
tion, then the banking system will stand firm, then 
the paper will be equal with gold, then we shall 
have a circulation of perhaps $650,000,000 of good 
money, redemption of the notes will rarely be called 
for, and will be perfectly easy when it is called for, 
and such a thing as a panic attacking the currency 
will be rarely or never witnessed. Let no man say 
that it will cost too much to maintain $350,000,000 
of metallic money. The Director of the United 
States Mint, in his Report for 1862, tells us, as the 
result of careful observations and experiments at the 



ox CURRENCY IN THE UNITED STATES. 313 

mint, that the average abrasion of all our gold and 
silver coins in times of their circulation is ^V^ P^r 
annum. To maintain, then, a metallic circulation 
of $350,000,000 would cost $145,833 a year; we 
doubt whether as much paper money can be kept 
good for that sum, considering the losses from acci- 
dent, from counterfeiting, and similar items. There 
is no credit in gold and silver money. It promises 
nothing. It represents nothing. It stands in its 
own right of value exactly as any other commod- 
ity, as is shown by the fact that it is worth scarcely 
more as coin than as bullion. The most that can 
be said of any paper money is, that it approximates 
in value and steadiness to a gold and silver money. 
The closer the approximation, the better the paper. 
Considering the likelihood that Congress will be 
urged to allow of more paper money, and the like- 
lihood that they will yield to such urging, and the 
certainty that such action will postpone the day of 
resuming specie payments, and the probability that 
the whole system will be more or less endangered 
thereby, we cannot predict with any confidence the 
high success of the system. It is perhaps rather to 
be hoped for than expected. 



314 ELEMENTS OF POLITICAL ECONOMY, 



CHAPTER XII. 

ON CREDIT. 

Political Economy is the science of exchanges ; 
but there are certain exchanges which have this 
peculiarity, that the return service 'is not rendered 
immediately, but is impliedly or expressly promised 
to be rendered in the future. This peculiarity is 
important to be considered, and gives rise to all 
those phenomena which pass under the general 
name of Credit. The commercial use of the term 
credit is loose and various, denoting sometimes the 
reputation of a person for solvency, as when it is 
said, " So and So has good credit;" and sometimes 
denoting a general state of the public mind, in 
which use it is synonymous with confidence, as 
when it is said, " Thei'e is no credit in a time of 
commercial crisis;" and sometimes denoting also 
the paper evidences of an obligation resting on 
some party to render a return service for some ser- 
vice already received. Credit, in general, may be 
defined as an exchange in which the return service 
is delayed, and which usually gives birth to a writ- 
ten evidence that such service is due. In order that 
this form of exchanges may be common, it is of 
course needful that there should be a general confi- 
dence in the public mind; in other words, a general 
expectation that such debts will be promptly paid. 



ON CREDIT. 315 

As indicating a common honor and financial ability 
among business men, and as facilitating the produc- 
tion of services of all sorts, this state of general 
confidence is so desirable in the sphere of exchange 
that great pains should be taken that nothing occur 
to destroy it; — the destruction of confidence and 
credit being usually caused by the undue extension 
of the one, and the excessive multiplication of the 
evidences of the other. We will first look at the 
principal forms of credit, and then at its advantages 
and disadvantages. 

(1.) Book Accounts. A charge in a trader's 
books is both a current and a legal evidence that 
the person charged has received a certain service, 
and has virtually promised to render the sum charged 
as a return service. This is the most common of 
the forms of credit; and if the person charged fails 
of his own accord to complete the exchange thus 
commenced, the law, in the absence of any proof to 
make the charge suspicious, collects it, if possible, 
and forcibly completes the exchange. The conven- 
ience of this form of credit is so great that it is not 
likely ever to be disused ; and as between people 
who deal much with each other is very useful, inas- 
much as their re.-^pective book accounts are set 
against each other in settlement, and only balances 
are required to be cancelled in money. It is for the 
benefit of both creditor and debtor, however, that 
such credits should be short in time, and such settle- 
ments frequent, since thus only does the creditor 
realize the gains of the exchange, and the debtor 
keep fair his mercantile name. If it be difficult or 
impossible to follow strictly the excellent financial 



816 ELEMENTS OF POLITICAL ECONOMY. 

maxim, " Pay as you go," the next best thing to 
that is, " Go and pay." The gains of an exchange 
are lessened, or its terms become more onerous, just 
in proportion as delay in its completion is experi- 
enced or expected. Book accounts are subject also 
to this disadvantage as compared with other forms 
of credit, that their number and amount as against 
any person are less likely to become publicly known, 
and therefore he is more likely to be trusted in this 
form by others beyond the point of his solvency 
and their safety. 

(2.) Promissory notes. These are issued by indi- 
viduals, corporations, and nations. They are usually 
on interest ; and in this case, if the principal be con- 
sidered secure, and the interest be promptly paid, 
the element of time is comparatively a matter of 
indifference, because the interest is compensation for 
delay, and is frequently the motive on the part of 
the holder of the note for rendering that service of 
which the note is evidence. Bank-bills are a form 
of promissory notes not on interest, and the bank 
issuing them really borrows of the people, and has 
the use of that amount of money, without paying 
interest, but offers, as a kind of compensation for this 
privilege, to convert its notes into coin on demand of 
any holder. It is this proffered convertibility into coin 
that enables the promissory notes of a bank to circulate 
as money, while the notes of other corporations and 
individuals equally solid and solvent do not circulate 
as money. It must be borne in mind, however, that 
the offer to convert them into cash does not essen- 
tially alter the nature of bank-notes ; they are a 
form of credit ; and although they are commonly 



ON CREDIT. 317 

issued against another form of credit, namely, against 
the interest-bearing notes of individuals wlio resort 
to the bank for discount, this only complicates the 
exchange without changing its nature. It is an in- 
stance of exchanging one form of credit for another 
which happens to have a greater currency or validity 
than the first, and for this superiority of the bank 
credit the individual credit pays an interest, in other 
words, is discounted ; and such exchanges of one 
form of paper credit for another, with or without a 
premium, may go on indefinitely ; as credit money, 
such paper may serve as a medium in many ex- 
changes ; but ultimately, and before the entire series 
of transactions is closed, such paper is to be ex- 
changed for something that is not paper; it is 
redeemed in cash, or gives a claim to something no 
longer credit which is in reality the return service for 
the original service rendered. When such promis- 
sory note, or other form of credit, is payable to 
bearer, it may run a devious round, may play a part 
in many a transaction ; but it is in reality nothing 
but a general waiTant entitling the holder, in view of 
some original service of the claim for the return of 
which he has become in some manner possessed, 
to take his satisfaction for that service whenever he 
will. It is like the land warrants, given by the 
United States, entitling the holder, in return for mili- 
tary service rendered, to locate his acres on any unoc- 
cupied national land within the national boundaries. 
As a warrant, its function ceases so soon as the acres 
have been chosen. Credit passes into payment. 
Thus bank-bills are redeemable in coin. The national 
legal-tender notes are fundable in government bonds, 



318 ELEMENTS OF POLITICAL ECONOMY. 

another form of credit, but whose principal and 
interest are payable in gold. The private notes of 
individuals and corporations are payable in money, 
and if in credit money, this itself ends in something 
that is not credit, and thus the circuit of exchange 
is completed. 

When the United States borrows money, it gives 
the lender a promissory note on interest at a certain 
rate, both principal and interest being payable at 
certain specified times. These notes are called indif- 
ferently bonds, stocks, or funds. The government 
has issued in the past four years nearly $2,500,000,- 
000 worth of them, in return for money loaned to it 
by the people, and they bear interest at rates varying 
from 5 to "7^-^ per cent., and are payable at periods 
varying from three to forty years. The bonds des- 
ignated as " five-twenties," bear gold interest at six 
per cent., and the government reserves the right to 
pay the principal in five years, and pledges itself to 
pay it twenty years from date. So of the "ten- 
forties." The "seven-thirties" are so named, not 
from the time of payment, but from the rate of inter- 
est, which is 7tVo per cent., payable in legal tenders 
for three years, when the principal is payable in the 
same, or fundable in six per cent, gold-bearing 
bonds, at the option of the holders. So ready have 
the American people been to loan money to their 
government for the past two years, and take these 
bonds as security, that the treasury has experienced 
very little embarrassment from the want of money, 
although the expenditures have been at times over 
$3,000,000 a day. In the course of one week in the 
spring of 1865, ninety and odd millions of dollars 



ON CREDIT. 319 

were subscribed to a national loan. It is believed 
that the history of national borrowing presents no 
parallel with the late success of the United States 
in realizing money in the way of loans. The largest 
English loans ever made were made in 1812 and 
1813, during the wars with Napoleon and the United 
States. In these two years the British exchequer 
borrowed $534,000,000, being an average of $22,- 
250,000 a month, and pronounced that a wonderful 
financial achievement, as it was ; but, from an ag- 
gregate of national wealth not larger than Eng- 
land's then was, though from a larger population, 
the United States has realized in four years from 
loans a sum about five times as large as that, and 
at an average rate of interest but little higher than 
England then paid, which was five per cent, and a 
fraction.! The national debt of England in March, 
1863, was $3,915,000,000, on which the average rate 
of interest was three and one half per cent. The 
national debt of France, which is rather more than 
half as large as England's, pays rates of interest 
varying from three to four and one half per cent. 
The entire debt of the United States, Oct. 1st, 1865, 
was $2,744,947,726; and the total interest upon it, 
$137,529,216. 

(3.) Bills of exchange. A bill of exchange is a 
written instrument designed to secure the payment 
of a distant debt without the transmission of money, 
being in effect a setting off or exchange of one debt 
against another. Thus, suppose A in Boston owes 
B in New York $1000, and another party, C in 
New York, owes A in Boston a like sum ; it is not 

1 Appleton's Annual Cyclopaedia, 1863. Article, " Finances." 



320 ELEMENTS OF POLITICAL ECONOMY. 

necessary that A should send the money to B to 
cancel his debt, and C send the money to A for a 
like purpose ; the two debts, by means of a bill of ex- 
change, are set off against each other, and both trans- 
actions are closed without sending any money from 
one city to the other. A draws a bill upon C, direct- 
ing him to pay B $1000, and sends this bill to C, 
who, if that mode of payment be satisfactory to 
him, accepts it by endorsing his name upon it, which 
completes the transaction between A and C, and 
then presents it with payment to B, which completes 
the transaction between B and A. A is called the 
drawer of the bill, C the drawee until he has en- 
dorsed, and then the acceptor, and B is the payee. 
Sometimes the bill passes through several hands, 
which may either be by successive endorsements, 
specifying to whom payment is to be made, or by 
what is called an endorsement in blank, by which is 
meant that the payee or subsequent holder, to whom 
the bill has been endorsed, merely writes his own 
name upon the bill, which is equivalent to making 
it payable to bearer. The remarkable convenience 
of bills of exchange in adjusting debts between dis- 
tant places has already brought them into very 
general use wherever the necessary basis for them 
in commercial integrity is supposed to exist ; and 
every year is witnessing an extension of their use 
in all commercial countries. Bills of exchange are 
either payable at sight, or after an interval fixed in 
the bill itself; and are either inland or foreign bills. 
Bills which have some time to run before maturity 
are frequently discounted by bankers or other money- 
lenders, that is to say, the payee transfers the bill to 



ON CREDIT. 321 

them, receiving the amount, minus interest for the 
time it has still to run ; and the bill thus serves the 
important function of enabling a debt due from one 
person to be made available for obtaining credit 
from another. It is a principal part of the business 
of banks to buy in this manner bills of exchange, 
either real bills, or accommodation bills, so called, 
which only differ from the others in that there is no 
real debt between the drawer and drawee, and col- 
lect them at maturity, thus securing bank interest 
on all money paid in purchasing such bills. The 
bills are discounted on the joint credit of the drawer 
and acceptor. It is evident that the use of bills of 
exchange, especially those which pass from hand to 
hand by endorsement, dispense with the use and 
transmission of large amounts of money, and, as 
between distant places especially, are one of those 
economizing expedients of credit which are the 
birth of modern civilization and a sound mercantile 
honor. 

Very similar are foreign bills of exchange in their 
functions and usefulness. Commercial relations be- 
tween two countries, say for example, France and 
England, always give rise to a mutual indebtedness 
of their merchants, and if these debts were all to be 
paid by the actual sending of money to and from, 
there would have to be a constant and expensive 
outward and inward flow of the precious metals in 
respect to each country, which necessity is neatly 
obviated by the use of bills of exchange, and coin 
is only transmitted to settle the balances on which- 
ever side there is an excess of debt. French dealers 
are always sending goods to England, and English 

21 



322 ELEMENTS OF POLITICAL ECONOMY. 

dealers goods to France ; and for what they send to 
England the French merchants draw bills on the 
parties to whom the goods are consigned, and the 
English merchants draw similar bills on their debt- 
ors in France ; these bills are bought up by bankers 
or brokers in either country, and exposed again for 
sale to any parties who may have debts to pay in 
the other country. Thus bills on London, in other 
words, on English debtors, are always for sale in 
France ; and bills on France, that is, on French 
debtors, are always for sale in London ; the mutual 
debtors of the two countries, therefore, instead of 
sending coin to cancel their debts, buy and trans- 
mit these bills. As I wish to make the course and 
par of international exchange very plain to my read- 
ers, I will give a particular illustration. Suppose 
Pierre & Co., of Paris, send a cargo of wine to Bar- 
clay & Co., of London, worth <£5000 ; the London 
firm thereby becomes indebted to the Paris firm to 
that amount, and Pierre & Co. draw a bill on Bar- 
clay & Co. for £5000', if they themselves have no 
debt to pay in London, they sell this bill to a Paris 
broker (if the exchange be then at par) for its face, 
minus interest for the time it has to run; and this 
broker is now ready to sell the bill again to anybody 
in Paris who has a debt to pay in London ; and the 
person in London who receives it in liquidation of a 
French debt to him, presents it at maturity to Bar- 
clay & Co. for payment. A bill drawn in London 
for a cargo of hardware sent to Paris, is similarly 
negotiated with a London broker, and finds its way 
similarly to France, in payment of some English 
debt, and ends its career when it reaches the French 



ON CREDIT. 323 

firm on which it was originally drawn. We are 
now in position to understand clearly what is meant 
by the par of exchange. The merchants in Paris, 
who have debts due to them in London, draw bills 
of exchange for the amount of these debts, and, 
through the agency of middlemen or brokers, go 
into the market to sell these bills to other Paris mer- 
chants who have debts to pay in London. If the 
former set have a larger amount to sell than the 
latter have occasion to buy, in other words, if there 
be a larger amount of debts due from London to 
Paris, than from Paris to London, then the compe- 
tition of the sellers of bills on London will lower 
their price somewhat in the market, in order, as 
usual, that the supply and demand may be equal- 
ized. In this case the par of exchange is disturbed, 
a bill on London for XlOO may not sell for over 
.£99, and the exchange is then said to be one per 
cent, against London, or, which is the same thing, 
one per cent, in favor of Paris. The par of ex- 
change, therefore, between two countries, depends 
upon the substantial equality of their mutual debts; 
and if an exchange unfavorable to either continues 
long, and especially if the discount on its bills be 
sufficient to cover the charges of the transmission of 
specie, gold will begin to flow from the country 
against which the exchange has turned, and the 
equilibrium of payments, and hence the par of ex- 
change will be restored. Also, the par tends to 
restore itself, without the sending of specie, in this 
way: if bills on London are at a discount in Paris, 
for the same reason that they are so will bills on 
Paris be at a premium in London, and therefore 



824 ELEMENTS OF POLITICAL ECONOMY. 

there will be a direct encouragement to the extent 
of the premium for exportations from England to 
France, because on every cargo sent bills can be 
drawn and sold in London for a premium ; but the 
more bills on Paris thus offered, the more the pre- 
mium disappears, and the par of exchange is restored 
so soon as the debts thus contracted by France are 
equal to the debts due her from England. At the 
same time, and so long as the discount on London 
bills continues, there is a discouragement to further 
exportations from France to England, because the 
bills drawn in virtue of such cargoes can only be 
sold below par. Here is another instance of a mag- 
nificently comprehensive law by which Nature vindi- 
cates her right to reign in the domain of exchange. 
It is through this law, stimulating exportations on 
the one side, and slackening them on the other, that 
most of the casual disturbances of the par of ex- 
change aTe rectified ; but if, notwithstanding this, 
the disturbance continues obstinate, it indicates one 
of two things as true of the country against which 
the exchange has turned : it has either made over- 
purchases of the other country beyond the power of 
its ordinary exports to cancel, or the money in which 
the bills drawn on it are liable to be paid is an 
inferior money. In the first case, the only proper 
remedy is an export of gold to pay off the old scores, 
and a more prudent method of purchasing in the 
future; in the second case, which is well exemplified 
in the instance of Amsterdam, cited in a preceding 
chapter, the remedy is to raise the currency to a 
good specie standard. When the rates of exchange 
were first established between England and the 



ON CREDIT. 325 

United States, the pound sterling was reckoned as 
equal to $4.44 of our money ; since then the weight 
and fineness of our gold coins have been reduced, 
and the real par of exchange is one pound for $4.87; 
the old nominal par however remains as the stand- 
ard, so that the exchange is really at par when it 
stands in the quotations as 109^, or 9i per cent, 
above par. Our gold dollar contains 23.2 grains of 
fine gold, and the English sovereign 113 grains and 
a fraction, and the true par therefore is 4.87 for 
1. The par of exchange between France and the 
United States is 5 francs 17 centimes for $1; and 
between France and England, is 25 francs 20 cen- 
times for £1. 

(4.) Checks. Formerly, in England, and in other 
countries as well, every considerable dealer kept his 
strong box, and when he had occasion to make pay- 
ments, told down the solid cash upon his own 
counter. Afterwards, the goldsmiths of London 
solicited the honor of keeping in their vaults the 
spare cash of the merchants, who in their payments 
among one another came to employ checks drawn 
on the goldsmiths, and at the shops of the latter 
the principal payments in coin were effected. The 
later introduction of banks brought along with it 
the custom, now continually widening in commercial 
countries among all classes of people, of keeping 
one's funds with a banker, and making payments 
by orders, or checks, upon him. When the person 
making the payment and the person receiving it 
keep their money with the same banker, there is no 
need of any money passing at all in the premises, 
the sum being merely transferred in the banker's 



826 ELEMENTS OF POLITICAL ECONOMY. 

books from the credit of the payer to that of the 
receiver. The banker is quite willing to do this 
business for nothing, and even to allow the depos- 
itors a low rate of interest on all balances remaining 
in his hands, in consideration of the privilege he en- 
joys of loaning such proportion of the sums as he 
deems safe to other parties at a higher rate of inter- 
est. In the large cities, by an arrangement called 
" the clearing-house," substantially the same ben- 
efits are secured as if all the people of the city 
kept their cash at the same bank ; inasmuch as all 
the checks drawn on each of the different banks, 
and passing in the course of the business day into 
other banks, are assorted before evening at the clear- 
ing-house, and set off as far as possible against each 
other, leaving only balances to be adjusted in money. 
So long as the banks are strong and solvent, the 
safety of such checks is only surpassed by their con- 
venience, which itself is enhanced by the facility 
with which they pass by endorsement from hand to 
hand, perhaps a dozen times in a morning, making 
payments equal to their face as often as they are 
transferred, and thus dispensing with the use of 
large masses of coin. 

Some of the advantages of credit have been 
already anticipated in the discussion of its principal 
forms; but it is important to be observed that credit 
creates nothing except the paper embodying the 
evidence of it, but either, first, transfers the owner- 
ship of a return-service already in existence, and 
ready to be rendered at any time, into other hands; 
or, second, anticipates a return-service not yet ready 
to be rendered. Thus, when I deposit an 



ON CREDIT. 327 

with a sound banker, and afterwards draw a check 
for the amount, which check passes by endorsement 
through a dozen hands before being presented for 
payment, there is a simple transfer by means of 
credit of the ownership of a service all ready to be 
rendered at any time, and the check does more con- 
veniently, perhaps, exactly what the $100 in cash 
would have done, if, instead of depositing it at all, 
I had paid it out to the man to whom I paid the 
check, and he to the second, and so on through the 
dozen. The twelfth man in either case, and each 
in turn in the last case, receives an $100 in cash, 
the proprietorship of which, in the case of the check, 
passed from one to the other. But when 1 loan a 
poor artisan an $100 to buy stock with, and take 
his note, which is to be paid from the proceeds of 
his year's work, the return-service is wholly antici- 
pated, and the element of time comes in, as well as 
the element of risk. Indeed, the element of time is 
the only basis of the distinction in hand. Credit in 
its nature is always the same thing, is always an 
exchange in which the return-service is contingent, 
.and although the probability that it will be rendered 
is susceptible of all the degrees from a wellnigh 
certainty that it will to a wellnigh certainty that it 
will not, that is a matter which must be judged of 
from the character and condition of the party who 
is bound to render it, and nothing needs to be said 
about it in this connection; but time is a more cal- 
culable element in credit, and since credit is substan- 
tially delay and not power, since it only transfers 
capital from hand to hand and creates nothing, it 
follows that for the safety of both creditor and 



328 ELEMENTS OF POLITICAL ECONOMY. 

debtor, the time of credits should be short. Some 
people, seeing men prosper on borrowed capital, 
seeing the undoubted benefits of some forms of 
credit, have jumped to the conclusion that credit is 
a positive productive agent, a thing to be put on a 
level with labor and capital. No. Labor united 
with capital will work wonders, and the nature of 
capital is not altered by the fact that it has been 
borrowed, and when skilfully used by the borrower 
will net him a profit besides paying back principal 
and interest; but it is a strange jumble to ascribe to 
the credit, which merely transfers the capital for a 
time, the efficiency which is due to the capital 
united with labor. Let the nature of credit be 
distinctly understood at the outset, and it is im- 
possible that there should be any confusion in the 
premises. Both parties to a credit exchange un- 
doubtedly expect to be benefited thereby, otherwise 
it would not be made ; and the party who parts with 
money, or labor, or whatever is rendered, gives over 
to the other in consideration of a promised equiva- 
lent, a positive power, which would doubtless have 
been somewhat efficient in his own hands, but 
which is expected to become more efficient in the 
hands of the other. Its whole efficiency, therefore, 
obtained in the hands of the borrower, is not due to 
credit, but only that surplus efficiency over and be- 
yond what the loan would have had in the hands of 
the original holder, or rather, over and beyond what 
must be rendered by the borrower to the original 
holder. It is only in this sense that credit can be 
said to have efficiency at all ; and, short times being 
presupposed as essential, since the gain of the cred- 



ON CREDIT. 329 

itor is not in the promise but in the fulfilment, it is 
precisely here that we are to look for the first class 
of advantages which a general credit system can 
offer. 

There are some men, and particularly young men, 
who have integrity and industry and skill, but no 
capital; and when such men are enabled to borrow 
money to start themselves in business, or to enlarge 
a business already in successful operation, the gen- 
eral interests of production, as well as their personal 
interests, are subserved by such credit, because in all 
probability capital thus passes from hands which are 
less to hands which are more able to use it produc- 
tively. Those who are best able to make capital tell 
are generally those who are most desirous to obtain 
it, and frequently those who can offer the best secu- 
rity for its replacement. Nothing is to be said against, 
but everything in favor, of such a loaning of capital 
as shall bring it, under safe conditions, from the hands 
of the idle, the aged, those indisposed, or those in- 
competent to use it productively, into hands at once 
competent and honest. Such credit is a benefit, and 
only a benefit, to all the parties concerned, and to 
society at large. The operators retain something of 
profit after replacing the capital with interest; the 
lenders receive more than if their capital remained 
idle, or they employed it themselves; and society is 
benefited by a more complete development and rapid 
circulation of services. Despite all the instances of 
broken faith, it is still an honor to human nature that 
men do so gain by good character the confidence of 
their fellows that they are, and ought to be, trusted 
with capital on their simple word or note ; and it is 



830 ELEMENTS OF POLITICAL ECONOMY. 

the glory of free political institutions, that under their 
influence, more than elsewhere, young men with no 
other dower than integrity and purpose do rise, by 
the help of so slight a stepping-stone as this, in 
crowds, to the high places of opulence. In the point 
of view, that thus all the available capital of the com- 
munity is brought out into productive activity, too 
much can scarcely be said in favor of joint-stock 
companies, whose managers are known to be men 
of probity, which gather up the driblets of unoccu- 
pied capital here and there, and, combining them, 
enter upon paths of profitable production, which 
individual enterprise cannot tread. Too much can- 
not be said in favor of savings-banks, which take the 
surplus earnings of the poor, and not only keep them 
safely, but pay a fair interest on each deposit, and 
loan the aggregate at a higher rate on choice secu- 
rities, thus stimulating frugality in a wide circle of 
depositors, and at the same time aiding production 
by opportune loans to the best class of borrowers. 
Here too come in life-insurance companies, which 
illustrate the advantages of credit in a most gratify- 
ing light, and whose action I hope to see extended 
to larger and larger classes of men, since it tends to 
transmute low and selfish cares into a noble care for 
those who are to come after, who might otherwise 
be left penniless dependants, and by elevating and 
enlarging the views of men, to make them better pro- 
ducers and better citizens. In this category of the 
advantages of credit come also the ordinary bank dis- 
counts, made for short periods only, holding the debt- 
or to the strictest rules of payment, only professing 
and only enabled to help customers over the transient 



ON CREDIT. 331 

hard places in their business, and not to furnish the 
funds on which the business is mainly conducted. 
Sums drawn from the banks on credit should only 
form a part of the circulating capital of a business, 
and never be put into the form of fixed capital. The 
passing necessities of a business having an indepen- 
dent basis of its own can be safely and conveniently 
met by bank discounts. A bank is essentially a 
loan-ofiice, a combination of money-lenders who put 
their funds together for the better lending of them, a 
convenient institution at which lenders and borrowers 
come together, and in which there is a better knowl- 
edge of the reputation of the borrowers for solvency 
than the individual lenders could separately hope to 
obtain. So far as the capital stock is made up of 
small subscriptions, it has the advantage just spoken 
of, of calling otherwise idle sums into activity; and 
so far as no undue privileges are accorded to it by 
law, there is no branch of industry more legitimate 
and beneficial than banking. It is no essential part 
of the functions of a bank, that it manufacture and 
issue money ; the money it loans should be the na- 
tional money ; and if that, unfortunately, be credit 
money, the element of credit in the money should 
be sharply discriminated in the public mind from that 
element of credit by which the bank loans it to its 
customers. Bank credits are good, but that does not 
prove that credit money is good; and it was one 
ground of the viciousness of the late banking system 
of the United States, that the different kinds of credit 
involved in it were inextricably interwoven with each 
other in the common apprehensions, and when the 
money failed utterly, as it did repeatedly, to answer 



332 ELEMENTS OF POLITICAL ECONOMY. 

the purposes of money, people could not exactly tell 
whose fault it was. 

There is another class of advantages in credit, 
which do not depend so much on the transfer of 
capital from less to more productive hands, as on the 
facilities which credit affords in economizing the gen- 
eral operations of exchange. Here the advantages 
are derived from the convenience of settling accounts 
arising out of exchanges, rather than from the char- 
acter of the exchanges themselves. Look, for ex- 
ample, at bills of exchange. They serve to settle up 
the accounts arising from the commerce of two con- 
tinents, wdth but little transmission of money from 
either, and with but little loss of time. Bills drawn 
in New York on London are usually payable at 
sixty days' sight; and the merchant dispatching a 
ship is able to realize at once the value of her cargo, 
minus interest for the time his bill has to run ; he is 
indeed still liable in part to see that his bill is ulti- 
mately paid by his drawee; bat the commercial integ- 
rity of the leading houses in all countries is with 
justice so firmly believed in and acted on, that on the 
whole but little anxiety springs from this source. It 
is one of the noble things in international commerce 
that men trust each other across the oceans, and lay 
millions of value on the faith of a single firm. Inland 
bills of exchange equally facilitate settlements within 
the country itself; and checks contribute to the same 
end even more simply, passing readily in payments 
wherever the parties are known, and, though credit, 
doing the work of money more conveniently, and 
within certain limits as safely as money itself could 
do it. It is not strange that some thinkers and writ- 



ON CREDIT. 333 

ers, seeing these unquestionable benefits of credit 
even within the peculiar sphere of money itself, have 
come to think and to teach that credit might answer 
all the purposes of money, and, like Herbert Spencer, 
would leave the largest liberty to all men to issue 
money if they choose, and such money as they choose, 
and as much money as they choose, supposing that 
only that which is good in quality and sufficient in 
quantity can gain currency. The trouble with these 
writers, every one of them is, that they neglect the 
second and more delicate function of money, namely, 
that it is and ever must be a measure of value, and 
treat it only as a medium of exchange. Their scheme 
is inadequate therefore, and never can be realized. 
The very advantages of credit itself, which have now 
been explained, are dependent on this, that there be 
underneath it, to support and limit it, a solid basis of 
value-money, in whose denominations value can be 
reckoned, in whose coins the balances of credit can 
be struck, and whose security everywhere by natural 
laws only can enable fulfilment to join hand in hand 
with promise. If ever credit should usurp the whole 
domain of money, a tolerable standard of value 
would be no longer possible, credit itself would lose 
its foothold, and the vast balloon of promise, sailing 
for a while through the blue, the joy of projectors 
and the wonder of credulous spectators, would come 
down to the earth flapping, and floundering, and 
ruined. 

There are some natural disadvantages in credit. 
The first is, that when it is much given by dealers to 
consumers, the reverse results take place from those 
already characterized, and capital passes out from the 



334 ELEMENTS OF POLITICAL ECONOMY. 

hands of productive operators and becomes tempo- 
rarily unavailable as capital. When an industrious 
artisan or merchant has trusted out $1000 to dilatory- 
customers for six months or a year, it is so much 
withdrawn for so long from his active capital, and to 
make up the consequent loss of profit there must be 
an addition to the prices of his wares, and besides 
some bad debts belong to such a system, and there 
must be an additional price to compensate this, and 
thus the customers who pay promptly bear a part of 
the proper burden of the delinquents, who at least 
do not wholly escape, inasmuch as they ultimately 
(if they pay at all) pay a price enhanced by their 
own delay. If the current profit of capital be ten 
per cent., and the merchant sells and gets returns 
five times a year, something less than two per cent, 
profit may be charged to each article, but if he only 
gets returns at the end of the year, ten per cent, 
must be put upon everything. Hence the excellent 
maxim, " Quick sales and small profits." 

But the principal disadvantage of credit is seen in 
its action on prices through increased demand, and 
in its consequent tendency to produce commercial 
crises ; and this chapter will be concluded by a pre- 
sentation of this subject, together with a sketch of the 
three great commercial crises that swept over this 
country in 1837, 1847, and 1857. 

The cause of commercial crises is, in general, an 
undue expansion of credit ; or, to use an equivalent 
expression, a disproportion between the amount of 
debts and the available capital in the loan-market, 
or elsewhere, to meet those debts. 

A man's whole purchasing-power is made up of 



ON CREDIT. 335 

three things: first, the property in his possession; 
secondly, the value that is owed to hirn ; thirdly, his 
credit. He can buy value with these three things; 
and his power to buy is exactly measured by the sum 
of these three things. But while the first two are 
limited and ascertainable, the third, credit, is in a 
certain sense unlimited. Being based upon confi- 
dence, which is itself a variable quantity, a man's 
credit at one time may be vastly greater than at 
another, compared with his real property ; and, if he 
have the reputation of doing a safe and regular 
business, and is favored by circumstances, he will 
find himself sometimes able to buy on credit to an 
extent perfectly enormous compared with his capital. 
Instances are given of dealers, who, in times of 
speculation, have effected purchases to an extent 
seventy or even one hundred times greater than their 
capital. And on the other hand, in times of panic, 
men of known character and of financial solidity 
find it impossible to borrow a dollar. 

Now money acts upon prices only by being offered 
in exchange for commodities ; but we have seen that 
commodities maybe purchased by credit as well as 
by money ; when, therefore, credit is offered and re- 
ceived for commodities, it has the same influence 
upon prices, as when money is offered and received 
for them. The form which the credit assumes to 
effect the purchase is a matter of indifference, whether 
bank-notes, checks, bills of exchange, or book-credits, 
what acts upon prices is the credit, in whatever shape 
given, or whether it gives rise to transferable paper 
or not. 

It follows from this, that whenever there is an ex- 



ELEMENTS OF POLITICAL ECONOMY. 

tension of credit for the purpose of purchasing, there 
will be a corresponding rise of prices. He who em- 
ploys both his cash and his credit in purchasing, 
creates a demand for the article to the full amount 
of his money and credit taken together, and raises 
the price proportionally to both. 

There might be a simultaneous rise of price in 
several commodities, and a considerable spirit of 
speculation manifested in these, if there were no such 
thing as credit and all business were done by ready 
money ; but there could not be a general rise of 
prices as to all commodities ; for, while men spent 
more money on the few commodities, and they rose 
in price, they would have less money to spend on 
other commodities, and these would not rise, but 
rather fall. It is only when credit can be used freely, 
and increased purchases can go on in all departments 
at once, that there can be a rise of prices as to all 
commodities, and a universal spirit of speculation. 

At such times, and while prices are still rising, 
men seem to be making great gains ; those that sell 
while the fever is on do make great gains ; and they 
not only use their credit freely, but they really have 
more credit to use, from the very fact they seem to 
be prosperous. Everybody wishes to extend his 
operations to the utmost limit, in order to realize the 
greatest possible gains. Everybody wishes to use 
not only all his money, but all his credit. Every- 
body desires accommodation, and accordingly every- 
body gives accommodation. All forms of indebted- 
ness are greatly increased. Promissory-notes, bills 
of exchange, book-credits, are indefinitely multiplied 
in all directions. 



ON CREDIT. 337 

It begins now to be perceived in certain quarters, 
that the thing has been overdone ; speculative pur- 
chases cease ; prices begin to fall ; holders of com- 
modities are anxious to sell ; this very anxiety makes 
the price decline still further ; holders rush into the 
market to avoid a still greater loss ; and, as nobody 
wishes to buy when a market is falling, prices go 
down, down, down. Their inflated wealth collapses 
in the hands of the holders ; a panic often sets in, 
more unreasonable, if possible, than the previous over- 
confidence. Men must realize something from their 
property ; they sell it therefore, frequently, at almost 
any sacrifice ; but the small amounts of money thus 
realized, and all the loans which can be extorted for 
enormous rates of interest, now when credit is almost 
destroyed, are totally inadequate to meet the immense 
mass of debts contracted when confidence was high. 
Property for which a man gave his note for $10,000 
is now worth but $1000, but that fact does not an- 
nihilate his debt, or erase his name from the unlucky 
paper ; he is still bound for the $10,000. And as 
the mass of paper, greatly augmented during the 
period of excitement, comes to matm'ity, how can it 
be met ? It cannot be met. There is not disposable 
capital enough in the loan-market to meet it, even if 
it could be made available. But those who have 
capital hold on to it. They do not know whom to 
trust. Everybody seems to be losing, and many are 
failing all around them, and they will not loan. 
Those men therefore who have these debts to meet 
have no resource. They could borrow indefinitely a 
few months before, but now they cannot borrow a 
dollar. They besiege the banks with which they 

22 



338 ELEMENTS OF POLITICAL ECONOMY. 

deal, sometimes piteously, and sometimes bitterly, 
for accommodation. But the banks caimot help 
them. These men must fail. There is no help for 
it. Thousands do fail in every revulsion. Distress, 
more or less extensive, is the invariable consequent 
of the series of events called a commercial crisis. 
That series is constituted somewhat in this manner: 
first, business a little brisk ; second, confidence and 
credit enlarging; third, a spirit of speculation; fourth, 
a vast increase of all forms of debt ; fifth, the revul- 
sion, or what may be called the cascade of discredit; 
sixth, stagnation and distress. 

Such is the general course and history of a finan- 
cial crisis ; let us now, as was proposed, take up the 
three great crises in their order. 

The crisis of 1837 was characterized by a more 
reckless spirit of speculation, and by more general 
distress among all classes of people, than has been 
witnessed in the country since. The reason of this 
was, and it is the grand peculiarity of that crisis, that 
the trouble originated in the currency ; and we have 
already sufficiently learned that any disorder in the 
currency intensifies and repeats itself in all other 
directions. 

In his annual message to Congress in 1829, Gen- 
eral Jackson observes : — " The charter of the Bank 
of the United States expires in 1836, and its stock- 
holders will most probably apply for a renewal of 
their privileges. In order to avoid the evils resulting 
from precipitancy in a measure involving such im- 
portant principles and such deep pecuniary interests, 
I feel that I cannot in justice to the parties interested 
too soon present it to the deliberate consideration of 



ON CREDIT. 339 

the Legislature and the people. Both the constitu- 
tionality and the expediency of the law creating this 
bank are well questioned by a large portion of our 
fellow-citizens, and it must be admitted by all that 
it has failed in the great end of establishing a uni- 
form and sound currency." 

It must be said, in justice to General Jackson, 
that he gave the friends of the national bank a fair 
warning. He served a notice on them to " quit " 
seven years before their charter expired. Year after 
year in his annual messages he reiterated the charges 
against the bank ; and when, in 1832, he vetoed the 
bill to recharter it, and, a year later, removed from 
its custody the public deposits, everybody knew that 
the national bank would expire with its charter. 

In anticipation of this event. State banks sprung 
up like mushrooms, each anxious to obtain a share 
of the circulation which the national bank was about 
to vacate. There was an over-issue of bank-bills. 
One inevitable effect of a currency inflated in this 
way is to enhance prices, start speculation, expand 
credit, and prepare the way on the rising side for a 
crisis. Another effect, just as necessary, of such 
over-issue, is to turn foreign exchanges against a 
country, and drain away the very gold on which the 
bank-bills are professedly based. When the inclined 
plane of speculation and expanded credit has been 
gradually ascended in accordance with the first effect, 
the cascade of discredit is accelerated by the second 
effect. 

Just so it was in 1837. Large numbers of banks 
came into being with very little scrutiny into their 
resources. Whether they had capital or not, they 



840 ELEMENTS OF POLITICAL ECONOMY. 

issued their bills as freely as the oldest and best- 
established institutions; and the banks, in which the 
United States funds were deposited after their remo- 
val, were expressly enjoined by the government to 
make loans freely, especially to importing merchants. 

In such a state of things, every man could borrow, 
and did borrow. A spirit of speculation set in, which 
was not confined, as usual, to business men and deal- 
ers, but attacked all classes alike, — farmers, mechan- 
ics, and even clergymen. Under the influence of 
floods of paper money prices went up prodigiously. 

At the same time, the depreciation of the currency 
was indicated, as it always is, by the fall of the ex- 
changes, and the unwonted importation of foreign 
goods. "We imported in the year 1836 one hundred 
and ninety millions, while we exported less than one 
hundred and twenty -nine millions. Gold flowed 
from the country, of course it did, until thirty millions 
of specie had been drained from the reserves of the 
banks. To say the very least of it, |30,000,000, in 
the ordinary state of the currency at that time, drawn 
from the bank reserves, would withdraw $100,000,- 
000 from circulation. Just imagine the effect of 
withdrawing $100,000,000 from the circulation at a 
time when the mass of debts is enormous, when 
everybody must have money or fail, and when gold 
has largely left the country. You will have, I think, 
a commercial crisis with a witness; — a state of 
things described by Daniel Webster, when he speaks 
of the country " as overwhelmed with irredeemable 
paper, mere paper, representing, not gold, nor silver. 
No, sir, representing nothing but broken promises, 
bad faith, bankrupt corporations, cheated creditorSj 
and a ruined people ! " 



ON CREDIT. 341 

On the 1st of January, 1837, the Secretary of the 
Treasury estimated the state of the currency as fol- 
lows:— Bank bills in circulation $120,000,000; 
specie in circulation, $28,000,000 ; specie in the 
banks, $45,000,000. Besides the drain of $30,000,- 
000, which was shipped to Europe, there was a 
still further drain on this reserve of $45,000,000, 
in consequence of two governmental regulations. 
The first was the operation of the specie-circular. 
All public lands must be paid for in gold and 
silver. This produced frequent and sometimes large 
drafts from the banks of specie. The second was 
the order issued from the Treasury Department to 
distribute the surplus funds of the United States 
among the several States. Those State banks which 
had received the public deposits on their removal 
from the national bank supposed that the money 
would be left with them until the exigencies of the 
government should require its expenditure. They 
had therefore treated these funds as so much capital 
on which they could make loans. Judge then of 
their consternation, when they received an order 
directing them to distribute these funds in specie 
among the several States. Their loans must be at 
once, and very largely, curtailed. 

Then came the reaction. The failure of a single 
bank, in one of the Middle States, created a panic, 
which raged till every bank in the country, without 
exception, stopped payment. Even the banks fa- 
vored with the national deposits suspended with the 
rest, and the wheels of government were brought to 
a stand-still. 

An extra session of Congress was called, and what 



342 ELEMENTS OF POLITICAL ECONOMY. 

did the President, Mr. Van Buren, propose? To 
revoke the specie-circular ? Not at all. To postpone 
for awhile the distribution of the surplus funds? Not 
at all. The Message had no remedy to propose, no 
relief to offer. The doctrine was for the first time 
advanced, that all the government could do, or was 
designed to do, was to take care of itself, and could 
not be expected to legislate with reference to the 
monetary concerns of the people. 

The revulsion of 1847 was different in several 
respects ; neither was it so severe in this country as 
it was in England ; but so far as it prevailed in each 
country, it seems to have resulted from a similar set 
of circumstances in each. The currency did not play 
so important a part among the causes as we are 
compelled to assign to it in the crisis of 1837, nor as 
it undoubtedly did in 1857. Neither was the amount 
of credits so much enlarged beyond their usual or 
average amount as is generally the case before a 
revulsion. 

The circumstances were briefly these. While 
credits continued about as they were, or were slightly 
increased by railroad speculation, the capital in the 
loan-markets which had supported these credits from 
time to time, and on which they depended, was 
largely, and soniewhat suddenly, drawn off to be put 
into the form of fixed capital. All great public works, 
such as railroads, canals, and so on, take more or less 
money out of the loan-market, and convert it into 
fixed capital, and thus make it unavailable for future 
lending. This happened in 1847. Railroad-building 
was then at its height. The continual demands on 
the loan-market by these railroad-calls diminished the 



ON CREDIT. 343 

loanable fund to such an extent, that they who had 
been accustomed to rely on it in carrying forward 
their business, and whose own capital had become 
temporarily or permanently unavailable, found it im- 
possible to command that perpetual renewal of credit, 
which had previously enabled them to struggle on. 
Very large numbers failed. In England the mischief 
was so extensive, and the panic so great, that the 
government resorted to the expedient of allowing the 
Bank of England to violate its charter, and increase 
its loans beyond the point to which it is restricted by 
law. The chief interest of this crisis is, that it illus- 
trates the principle that circulating capital may be 
transformed into fixed capital too rapidly for the 
general interests of production. 

I pass now to consider briefly the last crisis of 
1857. And here a significant fact must be placed 
first and foremost. On the first day of January, 1856, 
as is shown by the bank-returns for that year, there 
was in circulation in this country $195,000,000 of 
bank-notes; and to support this enormous circula- 
tion, there was at the same time less than ^^500,- 7 
000 of specie in the vaults of the banks ; that is, in / 
the whole country, the circulation of bank-bills ex- 
ceeded the specie reserves in the proportion of -^©arto <^0 
one; while in particular States the disproportion was 
still greater; in Vermont more than eighteen to one, 
and in Mississippi, (Jefferson Davis's State,) nearly 
forty-two to one. It is obvious that the banks of the 
country, as a whole, were insolvent; they could only 
pay one dollar in4au. of their legal obligations; these ^JQ 
represented not gold and silver, but debts due to the 
banks, bonds, mortgages, and private notes, and 



344 ELEMENTS OF POLITICAL ECONOMY. 

however sure it may be that such credit money will 
ultimately be redeemed, it is totally unfit for cur- 
rency. 

And if the principles in regard to over-issue, which 
we have so often explained, are correct, and they are 
the settled doctrines on that point, it follows that we 
had in 1856 a largely depreciated currency ; and it 
might have been expected, and it was expected and 
predicted, that that depreciated currency would pro- 
duce its legitimate and necessary fruits. " It caused 
the rapid expansion of estimated values for almost 
every description of property, and thus made the 
anticipation of still larger values a ground of credit. 
High prices tempted speculation ; large returns ac- 
cruing from almost every species of investment, 
tempted merchants and business-men to become bor-' 
rowers on a large scale." 

They borrowed to carry on their own business, 
and invested their real capital in stocks, in railroads, 
in Western lands. The promise and the prestige of 
large dividends seduced capital from its safe and ac- 
customed channels and tended to expand the credit 
of individuals and corporations far beyond the basis 
of their actual property; for, it is important to notice, 
that, at such times, credits are based not only on 
every species of actual property, but on reputed 
property, future property, possible property. 

Thus while a mass of debts was being accumu- 
lated, and credit-paper of every name was multiplied 
to an unwonted degree beyond the convertible value 
of property in hand, the gold of- the country was 
being shipped away, as it always tends to be where 
a depreciated currency prevails ; and the quantity of 



ON CREDIT. 345 

imported goods was vastly increased, as it always 
tends to be in such circumstances. 

Such was the state in which the country found 
itself in the summer of 1857, largely indebted both 
at home and abroad. 

In the mean time, much of the property on the 
strengiii of which these debts had been contracted, 
begun to decline in value. It begun to be discerned 
that there was a difference between reputed property 
and actual property. Real estate at the West, city 
lots and wild lands, begun to collapse from their 
state of inflation. Railroad property of every kind 
had depreciated down to the neighborhood of actual 
value ; while a decided fall in the price of manufac- 
tured and imported goods was inevitable. 

The materials for a panic were thus in readiness, 
when an event occurred which sent a shock through 
every limb and fibre of the immense credii^system. 
This was the failure of the " Ohio Life and Trust 
Company." It was a corporation that had enjoyed 
the utmost of public confidence, into whose hands 
many a poor man had passed over his hard earnings 
for safe keeping, and whose branches established in 
all the great cities had widely connected it. A large 
number of persons all over the country were inter- 
ested in it, either as stockholders, or depositors, or 
holders of its obligations. Occurring too just at that 
critical time, its failure was a signal everywhere. 
Merchants and business-men came home from their 
summer resorts and watering-places with a rush. 
Confidence was gone. Every man was suddenly 
called on to pay, but looked in vain for a place where 
he might borrow. Extensions and new loans it was 



346 ELEMENTS OF POLITICAL ECONOMY. 

impossible to obtain. Prices of all kinds of property- 
went down to a minimum. Assets of debtors 
dwindled, till they could no longer sustain credit or 
furnish liquidation. As by a touch, property shriv- 
elled from the dimensions imparted to it by universal 
confidence and anticipated profits, to a mere skele- 
ton. To complete the disaster, the panic attacked 
the currency, and the banks suspended. I am not 
altogether without hopes that the one just character- 
ized will be the last of the series of great national 
commercial crises. 



ON FOREIGN TRADE. 347 



CHAPTER Xni. 

ON FOREIGN TRADE. 

The principles which determine the question of 
foreign trade have been already unfolded in these 
pages. It is only because their application to the 
wider field of international exchanges has been con- 
tested by some persons, while conceding their valid- 
ity within the boundaries of the individual nations, 
that it is now needful to bestow upon the subject a 
separate treatment, to demonstrate that the laws 
of exchange are universal and not partial, and to 
attempt to answer with candor and thoroughness the 
objections that have been raised to the conclusions 
established by the almost unbroken unanimity of 
political economists who have written during the last 
hundred years. Here, as everywhere else within the 
science, the safe appeal lies to the common sense of 
men. A writer whose simple object is to reach the 
truth, and who has no interest, real or supposed, in 
defending or overthrowing a dogma, will not confuse 
the understanding of his readers, and his own, by 
leaping at once into the most complicated phenom- 
ena which the domain of exchange exposes to the 
observation of an intelligent science. He will take 
the simplest cases first, will display familiarly the 
principles applicable to them, and then with the clue 
well in hand, will pass on, and can be followed 



348 ELEMENTS OF POLITICAL ECONOMY. 

through the most intricate portions of the subject. It 
is not owing so much to any inherent difficulties of 
the subject-matter, that the question of foreign trade 
has been the vexed question of the late centuries, as 
it has been owing to a false method pursued in dis- 
cussing it; a method which, however favorable to 
the apparent establishment of current maxims, and 
however approved by men of interested views, can 
never be made useful in the investigation of truth. 
It maybe considered as a point already well settled 
by experience, that no man's sagacity is sufficient to 
guide himself or others to any sound conclusions on 
this field, w^ho takes his stand at the outset amid the 
whirl of interlocking phenomena, and then endeavors 
to work himself out through the entangling meshes 
which surround him at every step. Happily, there is 
no need of any such procedure. Man is man, motive 
is motive, and exchange is exchange ; and the ap- 
parent chaos of commerce can be resolved through 
these alone into harmony and order. 

In our third chapter it was put, I believe, beyond 
the reach of controversy or cavil, that the only reason 
why men ever exchange services at all, is on the 
ground of a relative superiority at different points. 
This relative superiority at different points was 
shown to depend in individuals partly on natural 
gifts, partly on concentration ,of mind, or muscle, or 
both, on a single class of efforts, and partly on the 
use and familiarity in the use of the gratuitous helps 
of Nature aiding that class of efforts. The tailor 
makes the blacksmith's coat, and the blacksmith 
shoes the tailor's horse, for no other reason in the 
world, except that each has a relative advantage of 



ON FOREIGN TRADE. 349 

the other in his own work, and therefore there is a 
mutual gain in their exchanging works. To pretend 
that there would be any exchange between them, in 
case the blacksmith could make coats as well as the 
tailor, and the tailor shoe horses as well as the black- 
smith, would be to assert that man acts without a 
motive, and that exchanges take place without a 
gain. It was also shown in the same connection, 
that the greater the difference of relative advantage, 
the greater the gain of an exchange, because each 
purchases the service of the other at the rate of his 
own highest efficiency. To recur to the same ex- 
ample, while the efficiency of the tailor and the 
blacksmith each in his own trade remained at 6, the 
efficiency of each in the trade of the other being at 
5, there was only a gain of 2 to be divided between 
them ; but when by concentration and application 
the efficiency of each in his own trade rose to 15, his 
efficiency in the other remaining at 5, there was a 
gain of 20 to be divided between them. When the 
relative superiority of each over the other in his own 
trade was low, the gain, though sufficient to justify 
the exchange, was small ; but when the difference of 
relative advantage increased, just in that ratio did the 
exchange become more profitable to both. The obvi- 
ous inference from this, then drawn, and now re- 
peated, is, that every person who exchanges with 
others is directly interested in the highest efficiency 
and success of their efforts as well as his own. The 
diversity of relative advantage at different points 
exhibited by different nations, and consequetuly the 
gains of international exchange, were expressly re- 
served at that point to a later stage of our inquiry. 
That stage is now reached. 



350 ELEMENTS OF POLITICAL ECONOMY. 

The various countries of the earth have received 
from the hands of God a diversity of original gifts, 
in clin:)ate, soil, natural productions, position, and 
opportunity. This diversity exists for a good de- 
sign, and can never be substantially reduced by man, 
even if there were, as there is not, any good reason 
for desiring to reduce it. Besides original diversity 
in these respects, there has been developed in the 
history of the inhabitants of these countries, a diver- 
sity of tastes, aptitudes, habits, strength, intelligence, 
and skill to avail themselves of the forces of Nature 
around them. These differences are somewhat less 
inherent and more flexible than the others, but they 
exist, and always have existed, and in a greater or 
less degree always will exist ; and it is on these diver- 
sities, original, traditional, and acquired, that inter- 
national commerce depends ; it never would have 
come into existence without them, and it would 
cease instantly and completely were they to fade 
out. Men do not engage in foreign trade for fun ; 
they engage in it for the sake of the mutual gain 
derivable to both parties ; they desist from it so soon 
as that mutual gain disappears ; and there is no 
mutual gain in any series of exchanges, unless each 
party has a superior power in producing that which 
is rendered, compared with his power in producing 
that which is received. We will suppose a trade 
between England and France in cottons and silks, 
England sending cottons to France, and France 
sending silks in return. When and how long will 
this be a profitable trade ? Then, when efforts be- 
stowed in France upon silks will procure, through 
exchange with England, more of cottons than the 



ON FOREIGN TRADE. 851 

same amount of efforts bestowed in France upon 
cottons will produce of cottons directly ; and then, 
when efforts bestowed upon cottons in England will 
procure more of silks, through exchange with France, 
than the same amount of efforts bestowed in Eng- 
land upon silks will produce of silks directl}'. So 
long as there is a difference of relative efficiency in 
the production of the two commodities in the two 
countries, so long, setting cost of carriage aside, may 
there be a profitable exchange of the two. To make 
such an exchange profitable to both parties, it is not 
at all needful that the cottons exchanged for the silks 
shall have cost the English as many days' labor as 
the silks may have cost the French ; or that the silks 
shall cost the French as much as the cottons cost the 
English ; it is not a question of the absolute cost of 
either commodity to the parties producing it; but a 
question of the relative cost of that produced in 
either country compared with what would be the 
cost of the other commodity were it to be produced 
in that country. The question for the Frenchman 
is. Can I get more cottons by working on silks 
for a month, and then trading with England, than I 
can get by a month's work on cottons at home ? And 
the question for the Englishman is, Can I get more 
silks by making cottons, and then trading with 
France, than I can get by trying to make silks at 
home? As this point is fundamental, and deter- 
mines the whole matter of foreign trade, it shall be 
illustrated arithmetically. Suppose that cottons 
costing $100 in England exchange for silks costing 
$80 in France : is that a losing trade for England ? 
Not necessarily. Is it a remunerative trade for 



352 ELEMENTS OF POLITICAL El::!ONOMY. 

France ? Not necessarily. It depends simply upon 
this : whether f 100 expended in England in the 
manufacture of silks will produce as many and as 
good silks as can be obtained for $100 by exchange 
with France ? If it will, depend on it, that |100 
will never go to France to buy silks. If it will not, 
and silks are in demand in England, then, clearly, 
the trade is advantageous to the Englishman. If 
the cottons costing $100 in England, and obtained in 
exchange for silks which cost but $80 in France, can 
there and then be made for $75, France makes a 
losing trade (but only by supposition), though she 
gets what cost $100 for what cost but $80. My 
readers will perceive, that it is not the absolute cost 
of commodities to the countries producing them that 
determines their value in foreign trade, but that cost 
relatively to what would be the cost of the return 
commodities were they to be grown or manufactured 
there. A demand in each country for the product 
of the other is of course presupposed in the illustra- 
tion. 

If this general representation be just, and I think 
every thoughtful person will concede it, then it fol- 
lows, that, setting aside a greater cost of carriage, 
foreign trade presents no elements peculiar to itself, 
but only the same elements which domestic trade 
presents; and consequently, that the same laws and 
limitations applicable to domestic exchanges are ap- 
plicable also to foreign exchanges. As in every other 
exchange, so here, there are two efforts, represented 
in this case by the cost of the respective commodi- 
ties, — the cottons $100, and the silks $80 ; there are 
two desires, — the desire of the Englishman for silks, 



ON FOEEIGN TRADE. 353 

and of the Frenchman for cottons ; there are two 
estimations, — the estimation of the Frenchman of 
the effort in silks required to obtain the cottons by 
exchange compared with the effort required to obtain 
them directly, and the Englishman's estimation of 
his effort in cottons necessary to procure the silks in 
exchange, compared with what would be the effort 
needed to manufacture the silks in England; and, 
finally, as always, two satisfactions. 

Now let us further suppose that while the cottons 
cost $100 in England, it would cost $120 to manu- 
facture there as good silks as can be made in France 
for $80 ; and that while the silks cost but $80 in 
France, it would cost $96 to make cottons there as 
good as the English can make for $100. On this, 
supposition, France can make both silks and cottons 
at a cheaper absolute cost than England can. But 
does that destroy the motive and the gain of an ex- 
change between the countries in these two articles ? 
Let us see. By exchange with England, France 
gets for $80 in silks, cottons which would otherwise 
cost her $96, — a handsome gain of 20 per qent. ; 
England gets for cottons costing her $100 silks 
which would otherwise have cost her $120, — another 
handsome gain of 20 per cent. Though France can 
make each commodity for less absolute money than 
England can make either, there is a diversity of rela- 
tive advantage, and therefore there might be in this 
case, as there is actually in many such cases, a prof- 
itable trade. The efficiency of France in making 
silks, relatively to that of England in making silks, 
is in the ratio of 80 to 120, — a difference of 50 per 
cent. ; while the efficiency of France in making 

23 



/ 



354 ELEMENTS OF POLITICAL ECONOMY. 

cottons, relatively to that of England in making the 
same, is only in the ratio of 96 to 100, — a difference 
of 41 per cent. In the majority of cases, doubtless, 
foreign trade takes place in articles, in the production 
of one of which each of the respective countries has 
an absolute advantage over the other, but an every 
way advantageous trade may be carried on in articles 
in the production of both of which one nation shall 
have an absolute superiority over the other, provided 
only that this superiority be relatively diverse in the 
two articles, as has just been shown. This is an 
effectual answer, as I take it, to the clamor of some, 
who object to importing articles which might be 
made at home for the same sum of money as for- 
eigners expend in making them ; admitted, that they 
might be so made ; does it follow that the country 
importing them would get them as cheaply by 
making them itself? By no means does that follow. 
By the supposition, the importing country has an 
efficiency in making those articles equal to that of 
the foreign country ; but it may also have a superi- 
ority absolute or relative over that country in the 
production of other articles which that country wants 
in exchange ; if so, the exchange complained of may 
go on to the manifest profit of both parties. Our 
general supposition a little changed will put this case 
in its true light : France can make cottons for $100 
which it costs England also f 100 to make ; shall she 
give up her trade with England in silks and cottons, 
because she can make cottons as cheap as England 
can ? She had better not. Let the exchange go on ; 
for $80 in silks she gets cottons which would other- 
wise cost her $100, — a gain of 25 per cent. ; Eng- 



ON FOREIGN TRADE. 355 

land gets silks for $100 which would otherwise cost 
her $120, — a gain of 20 per cent, as before. Let no 
nation be in haste then to drop a trade, because it 
thinks it can make the article received in exchange 
as cheaply as the other nation makes it, so long as it 
has an advantage over the other, absolute or relative, 
in making the article rendered in exchange ; and when 
that advantage ceases, the trade will drop of itself. 

What will be the extreme limits of the value of 
cottons and silks in a trade between England and 
France under the conditions supposed ? And when 
will a third nation be able to undersell either in 
the ports of the other? The extreme value of 
French silks in English cottons, will be 80 and 96 ; 
they cannot fall below 80, because they cost the 
French that to produce them ; they cannot rise 
above 96, because at that rate the French can make 
cottons, and there would be no gain in exchanging. 
Nations, no more than individuals, will get them- 
selves served at a greater effort than that at which 
they can serve themselves. If a given effort does 
not realize more through exchange than it would 
directly, then the exchange ceases of necessity, as 
fire goes out for lack of fuel. The extreme limits of 
the value of English cottons in French silks, will be 
100 and 120, for reasons precisely similar. There- 
fore the highest profits possible to both nations, 
under the conditions of the trade, are 20 per cent, 
each. France would be glad to take the cottons at 
a return of 80, at which rate her gain would be 20 
per cent. ; and she cannot under any circumstances 
offer quite 96, at which rate her gain would disap- 
pear. No third nation, therefore, in a trade of silks 



356 ELEMENTS OF POLITICAL ECONOMY. 

for cottons, can expel the French from the English 
ports, until it is prepared to offer nearly 96, or 
more, in silks in return for English cottons; that 
is to say, until its efficiency in making silks rel- 
atively to that of England in making them, differs 
more than that of France does, from the efficiency 
of France in making cottons relatively to that of 
England in making the same. A greater difference 
of relative advantage, and nothing else, will enable 
a third nation to undersell France in such a trade. 
England would be glad to take the silks at a return 
of 100, at which rate her gain is 20 per cent. ; and 
she cannot possibly offer quite 120, because at that 
rate her gain would wholly vanish. She could be 
undersold in the French ports, under similar condi- 
tions, and not otherwise, as the French in her own 
ports, as just now indicated. We have seen that 
the difference of relative efficiency in the production 
of the two articles in the two countries is in the ratio 
of 50 to 4^ ; and no nation can take away the silks 
of France from the English, or the cottons of Eng- 
land from the French, either with other cottons and 
silks, or any other commodity, unless its efficiency in 
the production of the commodity whatever it be, 
relatively to the efficiency of the two countries in 
the production of the two commodities, presents a 
greater difference than 50 to 4|. Here is the whole 
doctrine of one nation's underselling another in the 
ports of a third. It can do so under conditions of 
greater relative efficiency, and not otherwise. 

So far we have considered only their relative cost 
of production as determining the value of articles in 
foreign trade. But we know that the element of 



ON FOREIGN TRADE. 357 

desires also helps to determine all value. We come 
now to illustrate what is sometimes and properly- 
called "the Equation of International Demand." 

If the demand for French silks in England just 
answers to the demand for English cottons in France, 
so that the sili\S offered by France just pay for the 
cottons offered by England, then, cost of carriage 
aside, the gains of the trade will be equally divided 
between the two nations, each will realize 20 per 
cent, profit, because neither will have any motive to 
lower the value of its commodity below its highest 
value ; France, from its point of view, will offer 80 in 
silks and get 96 in cottons ; England, from her point, 
will offer 100 in cottons and get 120 in silks. Demand 
and supply are equalized at a point of value most 
favorable to both parties, and really determined by 
the relative cost of production. This case of equali- 
zation, though possible, is likely rarely to occur in 
practice. On any terms of exchange first offered, 
there is likely to be a stronger demand in one country 
for the product of the other than in this country for 
the product of that. This will lead to a change of 
value, and a new division of profits. The product 
for which the demand is less will find its market 
sluggish, and in order to tempt further and brisker 
exchanges, will be compelled to offer more favorable 
conditions. He who enters a market in quest of 
what is more in demand with a service in return 
which is less in demand, will have to lower his 
terms, or not trade. The equalization of supply and 
demand will only be reached in this case, by quicken- 
ing the demand for the commodity now less in 
demand, through an offer of better terms in trade. 



358 ELEMENTS OF POLITICAL ECONOMY. 

Thus, if the demand for French silks in the English 
ports be slack, in comparison with the demand for 
English cottons in France, at the rate of exchange 
first established — 80 for 96, the French merchant has 
no resource, if he wishes to continue the trade, but to 
offer more silks for the same amount of cottons, say, 
85 for 96. If this reduction prove sufficient to can- 
cel the account in cottons with the account in silks, 
then the trade will go on on this new basis for a 
while, the equalization of supply and demand has 
been reached through a new valuation of the com- 
modities, and there is now a different division of the 
profits. France gains now only 13 per cent, by her 
trade with England, while England gains 27^ per 
cent, in her trade with France. Under these new 
terms of exchange, it is possible that silks may again 
become heavy in reference to cottons, and a new de- 
cline take place in their relative value. If the French 
are obliged to offer 90 for 96, in order to obtain the 
cottons they want, their profits will sink to 5§ per 
cent., while the English profits will rise to 35 per 
cent. If, in any contingency, the French were com- 
pelled to offer in the neighborhood of 96 in silks for 
96 in cottons, the trade would cease of course, just 
as every other transaction ceases when the motive 
for it ceases. Of course, the cottons are just as likely 
to become dull in reference to silks, as the silks to 
cottons, and in this case England must lower her 
demands, and thus surrender a larger share of the 
profits to France. By the play of supply and 
demand, within the outermost limits drawn by the 
relative cost of production, is the value of articles 
determined in foreign trade ; and no degree of com- 



ON FOREIGN TRADE. 359 

plication in the variety of articles, or in circuitous ex- 
changes, affects, for substance, these fundamental 
principles. For example, if, instead of one article, 
as cottons, England sends two articles, or ten, to 
France in payment for silks, she will send in prefer- 
ence that article in which her labor is relatively most 
efficient, so long as the French demand will receive 
it ; then, when obliged to lower on that down to the 
point at which her next most available article stands, 
she will send that in quantities regulated by the 
demand for it; and so on to the end. No matter 
whether the articles be one or many; no matter 
whether the trade be a direct, or an indirect, trade ; 
the profits in all cases will depend, first upon the 
ratio of the cost of what is rendered to what would 
otherwise be the cost of that received ; and secondly, 
upon the relative intensity of the two demands. The 
greater the relative efficiency of any nation in pro- 
ducing an article of export, and the stronger the 
demand for that article in foreign ports, the more 
profitable does the trade become to that nation. 
The precious metals, whether produced at home, or 
obtained from other nations by another series of ex- 
changes, stand here in the same relations as other 
commodities, and are frequently the most profitable 
articles that a nation can export. The terms of in- 
ternational exchanges, then, between any two na- 
tions, are so adjusted, as to equalize the demand for 
their respective products, and cancel the debts mutu- 
ally incurred. 

It follows from all this by a necessary inference, 
that what a nation purchases by its exports, it pur- 
chases by its most efficient labor, and consequently 



360 ELEMENTS OF POLITICAL ECONOMY. 

at the cheapest possible rate to itself. Only those 
things, for the procuring of which a nation possesses 
decided advantages relatively to other nations, and 
relatively to its own advantages in producing directly 
what is received in return, are ever exported ; and 
hence, the return cargoes, no matter what they have 
cost their original producers, are purchased by this 
nation as cheaply as if they had been produced by its 
own most advantageous labor. This is a wholly im- 
pregnable position, and the advocates of restricting 
foreign trade are challenged to try their hand a little 
at its defences. 

We see also, at this point, what to think of those 
people who deem it needful that each nation should 
be able to " compete " with other nations in every- 
thing. Why are not these people consistent enough 
to apply their favorite doctrine of " competing " to 
domestic exchanges also, and demand that the cler- 
gyman shall have facilities for "competing" with the 
lawyer, the tailor with the blacksmith, the farmer 
with the manufacturer, the publisher with the author? 
Will these people never learn that all exchanges, do- 
mestic as well as foreign, depend on relative supe- 
riority at different points, and that a nation which 
should try to make its success in production equal at 
all points, would be as foolish as an artisan trying to 
learn and practise all trades at once ? Suppose the 
nation to succeed, what then? It would supply its 
wants at a certain average efficiency of effort; whereas, 
by a thorough development of all its own peculiar 
resources, it could command by exchange the prod- 
ucts of the world at a cost not exceeding that of its 
own most productive and efficient exertion. In one 



ON FOREIGN TRADE. 361 

word, whatever justifies individuals in selecting di- 
verse paths of production according to their capaci- 
ties and opportunity, the same justifies' the nations 
in fully drawing out their own best capabilities under 
the conditions in which God has placed them, and 
then, exchanging what costs them little for what 
would otherwise cost them much, in enjoying all that 
the world offers at the least expenditure of irksome 
effort. Such action promotes the common good of 
all the nations, and makes the best of all accessible 
to all, and arms each with the power of all ; while 
the opposite action, by lessening the diversities of 
relative advantage, so far forth incapacitates all for 
exchanges which are at once profitable and stimu- 
lating. 

Closely connected with the one just cited, is an- 
other narrow and superficial notion, happily less 
prevalent now than formerly, namely, that new im- 
provements in machinery, or other enhanced facili- 
ties of production, realized in any nation, are a dis- 
advantage to other nations in their trade with that 
nation. Let us examine this point. Suppose France, 
by new methods of silk culture, to become able to 
make the silk which before cost ^80 for $50, cottons 
in France, and silk and cottons in England, remain- 
ing in natural cost as before, does France alone gain 
the entire advantage of the increased cheapness of 
silk ? We will see. The production of silk in 
France is greatly quickened by the cheaper meth- 
ods, more is produced, more is carried to England to 
buy cottons with, but at the old rate of 80 for 96 
the English will not take any more silks, and the 
French, who can now abundantly afford it, since 



362 ELEMENTS OF POLITICAL ECONOMY. 

their nominal 80 is really 50, will offer more silks 
for 96 in cottons, in order to tempt a brisker and 
broader sale. They offer, say, 96 in silks for 96 
in cottons, and if that reduction of value of silks in 
cottons be enough for the equalization of the re- 
spective demands, the trade will go on on that basis, 
at least for a time ; and as there is now a larger dif- 
ference of relative advantage than before, there will 
be, as always in such cases, larger profits to be 
divided between the two parties. The 96 now 
offered in silks to the English is really only 60 in 
cost to the French, so that the French gain in the 
trade is largely increased ; they now get for what 
costs them 60 what would otherwise cost them 96, 
a clear gain of 60 per cent. Before" the new meth- 
ods of silk culture were introduced they gained 
only 20 per cent. But the English have also gained 
largely by the ingenuity and diligence of their neigh- 
bors. Before, they gained only 20 per cent, in the 
trade at best; now they get for what costs them 
$100 that which otherwise would cost them $144, 
a clear gain of 44 per cent. Indeed, it might easily 
happen, through the changes in international de- 
mand, that even a larger share of the benefit of 
the French improvements should accrue to the 
English than to the French themselves ; the share of 
the French all the while being large, and much lar- 
ger, than if, greedily endeavoring to keep all the ben- 
efit, they refused to trade at all. Thus we reach 
again, from another outlook, a grand doctrine of 
exchange, that each party is benefited by the prog- 
ress and prosperity of the other. The only way in 
which all nations can share in the benefits of the 



ON FOREIGN TRADE. 363 

thrift and enterprise of each other, is through mutual 
international exchanges ; and when each nation sees 
to it that it has a few commodities at least for which 
there is a strong demand among foreigners, and in 
the production of which themselves have a strong 
superiority, it may rest assured that it buys all it 
buys from abroad, gold included, at the cheapest rate 
to itself, and shares a part of the prosperity of every 
nation with which it trades. 

It is now time to look at the cost of carriage, thus 
far allowed to sink out of sight for the sake of greater 
simplicity of view. This is an important element in 
international exchanges, and one which must not be 
neglected, although Mr. Carey unduly enlarges upon 
it with a view to prejudice a free exchange. Cer- 
tainly, it costs something to carry any goods abroad, 
and to bring back a return, and we may be assured 
that if such return goods could be procured as cheaply 
without incurring such expense, the expense would 
never be incurred. The fact that all expenses con- 
nected with carriage are gladly borne by the mer- 
chants who carry on the trade, shows that the gains 
of the trade are so great as not only to pay freights 
and insurance, but also to leave a good margin for 
profits. Mr. Carey does not get around this stubborn 
fact. What use is it to pile up calculations to show 
that the expenses incurred in carriage, if applied to 
production at home, would secure as good goods and 
more of them ? If they would, why don't they ? 
Have n't men common sense ? Is n't self interest a 
tolerably strong motive-power? Is it needful to in- 
voke the mighty arm of law to compel men to act in 
accordance with their pecuniary interests ? Mr. 



364 ELEMENTS OF POLITICAL ECONOMY. 

Carey would restrict foreign trade, because it costs 
so much to carry on. Is that wise, provided the gains 
after all largely overbalance the cost ? If they did 
not overbalance it, would the trade go forward? If 
the cost be large, as it is, that is a good reason to 
desire its reduction, if possible; to labor for increased 
facilities of transportation, for cheaper freights, and 
better rates of insurance ; but to argue for forcibly 
stopping a trade by legal enactment, because it costs 
those so much who freely undertake to carry it on, 
does not strike me, and, I believe, will not strike my 
readers, as a sound argument. Which nation, a 
party in foreign trade, pays the costs of carriage ? 
Or does each pay them in equal proportion ? The 
aggregate cost of transportation to tHe foreign mar- 
ket is so much added to the cost of production, and 
is a deduction of so much from what would other- 
wise be the whole gain of the exchange ; but it is 
not true that each party necessarily pays the whole 
of his own freights, and therefore, that the party 
carrying bulky articles is at a disadvantage compared 
with the other. He may or may not be at a disad- 
vantage. That will depend on the effect of the new 
expense, however divided, on the demand in the 
respective countries. Suppose, that in the outset 
England pays the whole cost of carrying cottons to 
France, and France the whole cost of sending the 
silks to England; but as cottons are many times 
more bulky than silks proportionably to value, a 
larger bill of freights would fall to England ; and 
cottons would therefore fall relatively to silks ; but 
cottons and silks both have risen absolutely, that is, 
with reference to a given effort, or with reference 



ON FOREIGN TRADE. 365 

to a money standard. Suppose that France, in- 
stead of 8L) for 96, now has to give 82 for 96, and 
England, instead of 100 for 120 now has to give 
105 for 120. The French gain in the trade is re- 
duced by cost of carriage from 20 per cent, to nearly 
18, and the English gain from 20 per cent, to nearly 
14 ; but it is by no means certain that the trade 
would go on on these terms ; the enhanced price of 
silks might well deaden the demand for them in 
England, more than the relatively less enhanced 
price of cottons in France would affect the demand 
for them. Silks have risen in England 5 per cent., 
but cottons have risen in France only 2} per cent. ; 
it is therefore every way likely that thereafter the 
demand for cottons will be stronger than the de- 
mand for silks, and if so, the French will have to 
offer better terms, or, what is the same thing, be 
obliged to pay a part of the English freights ; so 
that there is nothing in the true state of the case 
to justify the conclusion jumped at by some people 
that they who carry heavy goods are at a disad- 
vantage compared with those who carry light goods. 
That will depend on the equation of international 
demand. Nothing in the nature of things hinders, 
that each party shall in effect pay the freights of 
the other, or one even really pay the freights of 
both. 

These, then, are the essential principles of foreign 
trade, brought out, it is hoped, as clearly and con- 
secutively as the relative and complicated nature 
of the transactions will allow ; and in the light of 
these principles it is very clear that foreign trade is 
just as legitimate as domestic trade ; that it rests on 



366 ELEMENTS OF POLITICAL ECONOMY. 

the same ultimate principles in the constitution of 
man and in the providential arrangements of Nature ; 
that the profit of it is mutual to both parties, or it 
would never come into being, or, coming into being, 
would cease of itself; that to prohibit it, or restrict 
it, otherwise than in the interest of morals, health, or 
revenue, must find a justification, if at all, outside the 
pale of Political Economy ; that to say to any body 
of men who wish to render purely commercial ser- 
vices to foreigners, to receive back similar services in 
return, that such services shall neither be rendered 
nor received, is not only to destroy a certain gain, 
but also to interfere with a natural and inalienable 
right. 

Unfortunately, the old mercantile system, which 
was so wise as to believe that gold and silver were 
the only objects of real value, taught also, in coinci- 
dence with its fundamental belief, that foreign trade 
ought to be so regulated and restricted as to bring 
in the largest possible quantity of the precious met- 
als ; that each nation ought to sell much and buy 
little in order to grow rich ; that bounties ought to be 
given to exporters to encourage them to sell, and 
prohibitions laid upon importers to prevent their buy- 
ing ; and that the introduction, through exchange 
with foreigners, of articles which might be produced 
at home, should be by all means prevented by law, 
no matter what advantages for producing them for- 
eigners might have, or what advantages the nation 
itself might have in producing that which the foreign- 
ers would be glad to take in exchange. The mer- 
cantile system as such, is long ago dead and buried, 
but it has left one of its progeny behind it, of no 



ON FOREIGN TRADE. 367 

better birth than its parent, which has not yet found 
its predestined death and burial. This is the doc- 
trine soraotimes euphoniously and courteously de- 
nominated Protection to Native Industry, a designa- 
tion however not in the least indicative of its real 
nature. This doctrine, now utterly expelled from 
England and Germany, still lingers feebly in some 
other parts of Europe, and, though steadily declining 
in the United States, is still strong enough here to 
control the present national legislation. It has been 
reinforced, of late years, by the very respectable 
authority of Mr. Carey, some of whose points will be 
considered in the sequel; and by one or two other 
persons whose opinions are entitled to a respectful 
consideration ; and the prevalence of the doctrine in 
the popular mind, particularly in New England, is 
still such that I deem it useful to examine the topic 
at some length, preferring to do so in the way of 
replying to the main objections urged against the 
opposite doctrine of a free commerce, especially as 
Protection so called acts at present wholly on the 
defensive. Some of the objections are of a popular 
character, and I shall feel at liberty to subject them 
to a popular refutation ; while such as profess to be 
scientific, will, it is hoped, be met by a scientific 
method at least equal to their own. 

It may be proper to mention at the outset, to 
avoid misapprehension, as a matter purely personal, 
that I have no prejudices in favor of Free Trade. I 
was brought up in the old Whig school, and accus- 
tomed from my boyhood to hear and to repeat the 
current arguments in favor of what is called Pro- 
tection. I remember with perfect distinctness the 



868 ELEMENTS OF POLITICAL ECONOMY. 

Presidential campaign of 1840, in which this was a 
main plank of the platform ; and when, ten years 
later, as a student, I commenced to study Political 
Economy, I supposed that a protective tariff was a 
corner-stone of commercial prosperity. A careful 
study of the principles of this science, with a noting 
of the records of experience in the premises, and 
nothing else, has convinced me, as thousands have 
been convinced before and since, that the doctrine 
of Protection is based wholly upon the fallacies of 
the Mercantile System ; and since these fallacies 
have been abundantly exposed, no logical ground is 
left for a doctrine of restriction and prohibitions. 
And it is worth while to notice, in passing, how 
much the doctrine in question has gained by the 
use of the very attractive word " Protective." This 
word, so agreeable to our minds from its association 
with security of person and property, is not properly 
descriptive of the system. The system is one of 
restraint and prohibition, and, of necessity, so far as 
it is applied, both diminishes in amount the com- 
merce of the world, and diverts it from its own 
freely chosen channels. If the correct but prosy 
epithets " restrictive," " prohibitory," had been ap- 
plied to the doctrine, instead of the less accurate 
but agreeable "protective," the hold of the doctrine 
itself upon the general mind would, I imagine, have 
been far less tenacious. Let us remember that a 
word never yet changed the essential nature of 
anything. 

The first main distinction to which I call atten- 
tion, is that between a protective tariff and a rev- 
enue tariff. Upon this point a great confusion 



ON FOREIGN TRADE. 369 

exists in the common mind. It is not at all the 
doctrine of Free Trade that no duties shall be laid 
upon imported goods. Duties ought to be laid upon 
imported goods, because that is a convenient and 
unexceptionable mode of raising a part of the taxes 
by which government is supported. Very high du- 
ties may be properly laid upon luxuries that are 
imported, such as wines and plate, for example, 
because they who buy such things are able to pay 
liberally for the support of the government. Free 
Trade has nothing to object to any duties that are 
laid with a simple view to equitable taxation. A 
tariff for revenue, therefore, as a mode of taxing the 
people for the support of the government, a tariff 
honestly adjusted for that purpose, has nothing 
whatever in conflict with the broadest doctrine of 
Free Trade. England, for example, which has 
adopted a complete system of freedom in her for- 
eign commerce, still levies duties on imports, and 
will continue to do so, for purposes of revenue 
merely. She raises on the average about thirty- 
five per cent, of her aggregate revenue from this 
source. 

But the idea of a protective tariff is totally differ- 
ent. Here duties are laid upon foreign commodities, 
so high, as either to exclude them altogether, and 
thus give the domestic manufacturer or grower the 
complete monopoly of the home market; or, if the 
duty be not so high as to be entirely prohibitory, it 
is made high enough to raise the price of the for- 
eign article to the point at which the home manu- 
facturer is desirous of selling his own. The effect 
that is designed, and that actually follows, is to raise 

24 



370 ELEMENTS OF POLITICAL ECONOMY. 

the price to all consumers, in order that a factitious 
advantage may accrue to certain home manufac- 
turers. When most successful, the effect is to trans- 
fer money from the pockets of all consumers, to the 
pockets of a few manufacturers. I do not stop at 
this point to demonstrate the economical folly of 
this, my object now being to show the idea that 
always underlies protective duties. We have seen 
already in the first chapter, and shall recur to the 
subject in the next, how the doctrine of protection 
grew immediately out of the Mercantile System, the 
so called " Balance of Trade." Restrictive duties 
have never been laid in any age or country except 
for the purpose of securing, either a more favorable 
"balance of trade," or else certain supposed advan- 
tages to home manufacturers or growers. 

Now, the interesting question arises, which has 
been much agitated in this country, whether these 
two ideas of revenue and protection, which are so 
distinct and apparently incompatible, can be com- 
bined together? Whether a revenue tariff can be so 
adjusted as to afford incidental protection? De- 
feated as a general theory, and no longer able to 
stand upon its own merits, Protection, in this coun- 
try, only asks the privilege of leaning upon revenue. 
It is conceded that Protection for Protection's sake 
is improper ; but it is claimed that there is no harm 
in having as much protection as may incidentally 
result from a tariff framed for revenue. This shows 
how the general doctrine of Protection has declined, 
and seeks at last a compromise with freedom. There 
is no sound basis for such compromise ; and why ? 
Because revenue is only received on those goods 



ON FOREIGN TRADE. 371 

that come in, and protection is only secured when 
the goods are kept out. You get no revenue, except 
as you let the things in ; you get little protection 
except as you keep the things out. The two ideas 
are opposite and incompatible; one cannot ration- 
ally combine them; a revenue tariff with incidental 
protection is a solecism. But it may be said, that a 
moderate duty that shall lessen, but not prevent 
importation, will raise the price of the foreign arti- 
cle, and thus enable the home manufacturer to 
realize the same price. This is true. But just look 
at it. The government gets a revenue only on that 
part that is imported; the high price has to be paid 
upon all that is consumed. The government makes 
the people pay much, in order that the treasury may 
receive little. I think that that is no desirable way 
of raising a revenue. 

It follows, that the principles on which a revenue 
tariff should be framed are very different from those 
that should rule in protective tariffs. If the object 
be revenue, the duties should be low, so as not to 
discourage importation, or very sensibly increase 
prices. Low duties on all imports, except high- 
priced foreign luxuries, which are used only by 
the rich, and which may be taxed heavily without 
discouraging importation, will infallibly yield the 
largest aggregate revenue. The reason for this is, 
that society is like a pyramid standing on its broad- 
est base: each horizontal section of it is more ex- 
tended than the one above it. So in society : the 
number of those able to purchase an article at five 
dollars, is more than twice as numerous as those 
able to purchase it at ten ; and those who are able 



372 ELEMENTS OF POLITICAL ECONOMY. 

to buy it at one dollar are probably more than ten 
times as many as those who would buy it at five 
dollars. The official list of incomes for the year 
1864, in the Tenth District of Massachusetts, lies be- 
fore me, and selecting one town at random, I find in 
its list one income over $40,000, three over $30,000, 
seven over $20,000, nine over $10,000, thirteen over 
$5000, twer]ty-nine over $2000, and seventy-eight 
over $1000. A lower duty, therefore, on any article 
is likely to bring it within the reach of a much wider 
circle of consumers; and for many to pay a low duty 
is better for the revenue than for a few to pay a high 
duty. Of course, the exact limitations must be 
found out by experience ; but Alexander Hamilton 
long ago, in one of the papers of " The Federalist," 
called attention to the fact in this connection, that 
a large multiplier will not of itself make a large prod- 
uct. The multiplicand is also a factor. During the 
late- high prices, I was told by a prominent mer- 
chant, that the people not only did not buy as much 
tea as formerly, but also that they did not spend 
as many dollars for tea as when the article was 
cheaper. 

As between foreign nations, an interesting experi- 
ment is now going forward under the treaty of com- 
merce between France and England. In 1861, this 
principle of low duties was embodied in the mutual 
tariffs of the two nations, and the results thus far 
have delighted the friends and confounded the ene- 
mies of a free commerce. Not only has the amount 
of commodities exchanged prodigiously increased, 
but the increase of the revenue for England on the 
imports from France for the first three months of the 



ON FOREIGN TRADE. 373 

now system, over the corresponding quarter of the 
previous year, was $1,430,000; and the increase for 
France on the imports from England for the same 
three months, $7,382,000. Thus do facts corrobo- 
rate principles, and make us sure that we stand upon 
the rock. 

(1.) I shall now attempt to answer some objec- 
tions. One of the most common of these has been, 
that Free Trade is a theory: "It is all very well 
in theory, but it will not work in practice"; as if 
there could be a good theory that worked ill in prac- 
tice ! A theory that does not work in practice is a bad 
theory. That is the very way we determine whether 
a theory is good or bad, — Does it correspond with 
facts, — does it work well when applied ? If it does 
not, it is condemned, it is worthless. There is a pal- 
pable sophism in this expression, " Good in theory, 
bad in practice." What makes a theory good? 
Simply because it corresponds with and explains 
the facts. Newton's theory of gravitation is a good 
theory on this ground, and no other. If a man ob- 
jects to any theory, let him bring facts, principles, 
any truth whatever, to disprove it, and he shall be 
welcome; but don't let him delude himself and 
others by supposing that he can concede the theory 
to be good, and then save himself on the practice. 
A theory is good because it is good in practice, and 
for no other reason. 

There have been so many unfounded theories 
broached on all subjects, that the term has fallen 
into some reproach, and it is for this reason that 
the charge is brought against Free Trade, of being a 
theory : but there is nothing in the world more 



374 ELEMENTS OF POLITICAL ECONOMY. 

respectable than a good theory proved by solid argu- 
ments and verified by facts. I am prepared to show, 
however, that the charge of being a theory falls with 
far greater force against the doctrine of protection 
than against the doctrine of freedom. Free Trade 
can hardly be said to be a theory at all. It is the 
natural state of things. If you and I wish to ex- 
change commodities for our mutual benefit, there is 
no theory or doctrine in the premises; we exchange, 
and that is the whole of it. If a Massachusetts 
fisherman wishes to exchange his dried cod with a 
West India sugar planter, and the trade is mutually 
beneficial, what theory is involved ? They exchange, 
each is richer than before, and that is the whole 
of it. 

If now some one steps in between you and me, 
or between the fisherman and the planter, and says, 
" You shall not trade ! " he is bound to tell the 
reason why. The burden lies upon him. Let him 
bring forward his theory of restriction, and justify 
it. Let us hear the arguments and see the grounds 
that justify the prohibition of an advantageous 
trade! You see the burden of proof lies upon the 
advocates of restriction. It is the advocates of re- 
striction that drag in a theory which interrupts the 
play of natural laws, — which says to men who wish 
to trade, " You shall not trade!" Commerce is no 
game of grab, of fraud, of overreaching. Its ben- 
efits are reciprocal and mutual; otherwise there 
would be no commerce. The freights of the navi- 
gating interest, and the gains of the merchants, are 
but a very small part of the benefits of commerce ; 
the variety of commodities and of comforts which 



ON FOREIGN TRADE. 375 

every commercial nation enjoys, by exchanging its 
own surplus products for the surplus products of its 
neighbors, is the substantial advantage of trade. 
When now this beneficial interchange is going for- 
ward, or, if the artificial barriers were thrown down, 
would be going forward, who is he that takes upon 
him to curtail and to prohibit it? Who is he that 
thinks himself competent to manipulate the un- 
changing laws of trade? 

It is conceded by everybody that a free exchange 
of commodities within the same country is highly 
beneficial: what makes it suddenly cease to be bene- 
ficial as betWeen foreign countries? Does the mu- 
tual benefit of an exchange depend upon the accident 
that the parties to it are citizens or subjects of the 
same government? The south end of Vermont 
trades freely and advantageously with its neighbors 
across the line in Massachusetts; is there any good 
reason why the north end of Vermont should not 
trade just as freely and advantageously with its 
neighbors across the line in Canada ? These are 
questions which the theory of protection, in my 
opinion, cannot satisfactorily answer. 

(2.) I pass to a second current objection, namely, 
that if we admit foreign goods freely, we thereby 
employ the labor of foreigners, and so far diminish 
the wages of our own laborers. Let us see if this 
is so. Foreign articles are certainly wrought by for- 
eign labor; do we, then, by buying them employ 
foreign labor, to the prejudice of our own laborers? 
We are obliged to pay for everything we buy, — 
are we not? in what do we pay? Clearly, in the 
products of our own labor. We employ our own 



376 ELEMENTS OF POLITICAL ECONOMY. 

laborers to produce the articles which we exchange 
for foreign articles. We pay for our imports by our 
exports. Our exports are created by home labor, 
and the only possible way for us to obtain the 
results of foreign toil, is to offer in exchange the 
results of domestic toil. A commercial nation, there- 
fore, not only does not, but it cannot employ foreign 
labor. The more it buys of foreigners, the more 
home labor it must employ to create the articles 
with which it pays for what it buys. We must 
remember that the exports, taking the years together, 
must and do balance the imports. Free Trade, 
therefore, can by no possibility discourage home 
labor, or diminish the wages of laborers; and, as a 
matter of fact, labor is best rewarded, other things 
being equal, in the freest commercial countries. 

I deem it important thoroughly to demolish this 
objection, for it has been considered the stronghold 
of the advocates of Protection. I admit that a pro- 
tective tariff may stimulate a certain branch of man- 
ufacture, may concentrate capital in it, may call 
laborers into it, and even for a time increase the 
wages of those laborers. But competition will very 
speedily reduce wages in that department to the 
average level in other departments, and unless it 
can be shown that restriction increases the general 
wages-fund of a country, — that fund that is set 
apart for the payment of labor, — it is in vain to 
claim that it can increase the general wages of labor. 
Capital and laborers may indeed be withdrawn from 
one employment to another by artificial stimulus, 
but is there any general gain in that? While the 
one is stimulated, is not the other depressed ? I 



ON FOREIGN TRADE. 377 

have seen upon the ocean the wind blow up a wave, 
but I always noticed a depression behind it. The 
general level of the ocean is not raised, however 
high the waves rise. 

Now how can the free interchange of commodities 
lessen the demand for labor or the rewards of labor? 
You are employing a hundred men. You wish to 
obtain a certain quantity of cutlery. Does it make 
any difference to you or to the wages of your men, 
whether you employ them directly in making the 
cutlery, or in making buttons with which you can 
purchase the cutlery from abroad? If, by employ- 
ing them in making buttons you can purchase more 
and better cutlery, (and if you cannot, there is no 
temptation to an exchange,) is it not plain to reason 
that it is better for you, and that you can afford to 
pay them better wages, than if you employed their 
labor less effectively directly upon cutlery? This is 
but an instance, but it involves the principle. There 
is, there can be no discouragement to domestic labor 
in the freest international exchanges. Every foreign 
purchase necessitates the employment of domestic 
labor to create that with which the purchase is 
made, thereby enlarging the demand for laborers, 
and thus tending to increase their wages. The ten- 
dency of Free Trade is directly the reverse of that 
alleged in the objection ; because the varied objects 
of use and elegance offered to our desires by inter- 
national commerce, stimulate labor to create that 
with which to buy them. 

We know now how to answer those who say, that 
if we should trade freely, with England, for exam- 
ple, we should bring down wages in this country to 



378 ELEMENTS OF POLITICAL ECONOMY. 

the English standard. This is too hollow a bug- 
bear to frighten sensible people any longer. To say- 
nothing of the principles just explained, and others 
equally conclusive, that combine to scout it, the 
facts in the case would seem to settle the whole 
question. We have traded with England for eighty 
years, largely, increasingly, and from 1846 to 1861, 
almost freely, and yet wages have been constantly 
rising in America, and never stood at a higher figure 
than when the Morrill Tariff was passed in 1861. 

(3.) But if the doctrine of Protection be so false, 
and have no single solid argument in its support, why 
have so many nations acted on it, so many great 
men, among others, Daniel Webster, believed in it ? 
This objection I am bound to notice, for it has had 
no small influence. To estimate its force rightly, 
two things must be remembered : first, that the doc- 
trine of protection is an inheritance from the remote 
past, an outgrowth from a confessedly false dogma, 
which, being then universally received and acted on 
by the nations, has given this, one of its corollaries, 
whatever validity custom and prescription can give ; 
and, secondly, that there has always been a rich and 
influential class of men in the commercial countries 
who have supposed that their interests were sub- 
served by the practical application of the doctrine. 
In respect to Daniel Webster, the first great speech 
which he made in Congress, a speech that foreshad- 
owed his great fame, was delivered in 1814 on the 
tariff. It was a free trade speech throughout, une- 
quivocal and complete in its advocacy of commercial 
freedom. There he stood, in the pride of early man- 
hood, impregnable. If he left, fourteen years later, 



ON" FOREIGN TRADE. 379 

this high ground of truth and principle, to occupy 
the lower ground of what he deemed expedient, it 
was because the hostility of the South to the grow- 
ing commerce of the North contributed to bring 
upon the nation a high restrictive tariff, and Northern 
capital, thus prohibited the seas, embarked in exten- 
sive manufactures; and then the South, jealous again, 
proposed to reverse its policy and abolish the induce- 
ments under which this capital had been embarked. 
It was thus that Mr. Webster became the champion 
of manufacturing interests which he deemed were 
unjustly and factiously attacked. He never justified 
restriction as a principle; his commercial instincts 
were too strong for that ; he always attempted to 
justify his course by peculiar and factitious circum- 
stances ; almost half of his congressional life had 
passed away, before he could be brought to vote for 
levying high duties ; and although he afterwards 
brought forward, in defence of the position thus 
assumed, arguments which Political Economy pro- 
nounces unsound, and although there doubtless min- 
gled in with his motives a desire to gratify power- 
ful constituents and friends who were directly inter- 
ested in high duties, there is abundant reason to 
believe that his defection from sound principles was 
never so radical as has been commonly supposed. 

It is not difficult to see why there have always 
been so many advocates of the system of restriction. 
It is an old system. It is a system some of the argu- 
ments for which are superficially plausible. Above 
all, it is a system which many enterprising and pros- 
perous men have considered as essential to their 
pecuniary interests ; and when such men demand a 



880 ELEMENTS OF POLITICAL ECONOMY. 

champion, eloquence and arguments are never long 
wanting. As a matter of fact, the legislation of 
the world has been largely controlled by such men, 
and that too, not always in the interest of the 
masses. It is more than doubtful whether man- 
ufacturers as a whole class have ever been perma- 
nently benefited by protective duties, or rather, it is 
certain that they have not been ; but they have sup- 
posed that they were, and some of them have been, 
prodigiously benefited ; and they have acted, and are 
acting, on that supposition, and the power of such 
men over public opinion is very considerable. As a 
class, they are intelligent and rich, and can easily 
combine to influence opinion and legislation. But 
even if they were benefited, as a whole, by protective 
duties, what sort of justice is it to take money out 
of my pocket and put it into theirs ? I object to that. 
My mickle, and your mickle, and our neighbor's 
mickle will make a very pretty muckle, — a small 
tax on all consumers of protected goods will reach a 
very handsome sum ; but what valid claim can the 
manufacturers lay to it ? They are a very deserving 
class, and consequently prosperous ; but it may be 
respectfully submitted that they do not need unequal 
legislation in their behalf. They are not a needy gen- 
eration, but are well to do. The list of incomes on 
which a United States tax is paid, now annually pub- 
lished throughout the country, puts this fact beyond 
the shadow of question. In most sections of New 
England, they are the only men of large incomes. 
Now, it is no objection to these excellent men that 
they are rich, and getting richer ; they are rather 
deserving of all honor for their enterprise and vigor 



ON FOREIGN TRADE. 381 

and success ; but it is conclusive on this point, that 
they no longer need, even if they ever needed, any 
special protection .from the government. Let them 
stand on the same level of advantage with other men, 
let them enjoy no unequal privileges, and everybody 
will rejoice in their prosperity. At present, they 
occupy a false position, fatal to their own genuine 
self-respect, and to the hearty congratulations of their 
fellow-citizens. By far the larger part of the indus- 
trial interests of the country have no special protec- 
tion at the hands of government; and is it possible 
that these shrewd and able men who own and run 
mills and foundries, are willing to acknowledge they 
alone of their fellow-citizens are unable to render 
valuable and remunerable services to society with- 
out an artificial and governmental prop at their 
back? 

(4.) This brings us to another objection, namely, 
that, were it not for protective duties, our manufac- 
tures would collapse, or as it is sometimes phrased, 
other nations would take all our manufacturing away 
from us. The first thing to be said about this is, 
that we do not manufacture for the sake of manu- 
facturing, but for the sake of the product, — it is not 
the process that we care about, but the product; 
and even if it could be shown, as it cannot, that free 
trade would lessen the manufacturing, that would 
not be so deplorable, provided we obtained by it for 
the satisfaction of our wants as many or more man- 
ufactured products. Satisfactions, and not efforts, 
are ultimate in the field of exchange. In the second 
place, it is needful to look at the meaning of the 
word, manufactures. So far, I have used it in the 



382 ELEMENTS OF POLITICAL ECONOMY. 

loose popular way by which it has come to mean 
practically in this country the processes by which 
cotton, wool, and iron, are rendered available for 
various human uses. These more prominent inter- 
ests are currently meant under the terms manufac- 
tures and manufacturers ; but of course the terms 
properly include a wide range of efforts beyond these, 
indeed almost all forms of industry not agricultural, 
and not primarily mental. Now to say, in the broad 
sense, that protective duties are necessary in order 
that manufactures may succeed, is to make a state- 
ment which can be shown to be false. What is the 
magic of a protective duty? This, that it says to 
men who would otherwise come to our shores to 
trade, " You shall not bring those commodities you 
were about to bring, nor take away those commodi- 
ties you were about to take in exchange." People 
commonly look only at the first part of what is said, 
and console themselves by thinking, if foreigners are 
not allowed to bring those goods, somebody will make 
them at home for us. But this is only half of it. 
Those branches of manufacture, or of agriculture, as 
the case may be, which were furnishing the goods 
wherewith to pay for those commodities about to be 
imported but now prohibited, lose their market. If 
we will not buy, of course we cannot sell. If we 
prohibit importations, we thereby necessarily prevent 
exportations; that is to say, we take away their mar- 
ket from those who manufacture or grow the goods 
which would be exported. We depress a profitable 
branch of manufacture by taking away its market, 
for the sake of introducing or fostering a branch 
which is by supposition and confession unprofitable. 



ON FOREIGN TRADE. 383 

The advocates of protection do not claim that branches 
of business which would otherwise be profitable and 
self-supporting should be protected, but only the weak 
and less profitable kinds; and so to bolster up these, 
protective duties virtually destroy other branches of 
industry, which only ask that their natural market 
shall be let alone, to maintain an independent and 
profitable existence. It is impossible to characterize 
in terms of respect so short-sighted and miserable a 
policy. How can a free commerce depress manu- 
factures, when every nation must manufacture or 
grow a dollar's worth at home for every dollar's worth 
imported from abroad? How can high duties foster 
manufactures as a whole, when their very first effect 
is to cut off from their market all those manufac- 
tures which would otherwise have gone abroad with 
a profit, and their second effect merely to stimulate 
up to the general level of profit those which it is 
claimed will not otherwise yield a profit? 

The French manufacturers in 1861 were afraid 
that if the barriers of restriction were thrown down, 
as proposed in Mr. Cobden's treaty, their business 
would suffer from English competition. The result 
has shown how futile were their fears. A large part 
of the manufactures of either country are admitted 
into the other with perfect freedom, and the duties 
on most of the rest very materially reduced; and the 
French manufacturers have found, as the American 
at no distant day will find, that there is nothing 
which stimulates manufactures so much as a broad 
market, — not merely a home-market, but a world- 
market. The French sent to England, in 1863, 1,076,- 
000,000 francs worth of goods and received back 



884 ELEMENTS OF POLITICAL ECONOMY. 

within a trifle as much in return, which was almost 
a quarter of what they sent and received to and from 
the rest of the world. It is as the friends and not the 
■enemies of manufactures that we demand the abro- 
gation of restrictive duties. Manufactures as a 
whole can never reach their point of just expansion, 
until this professedly discriminating, really repressing, 
and only at a few favorite points stimulating, system 
shall be abolished. 

But it is said, that England can work up cottons, 
and Germany wools, and the North of Europe irons, 
cheaper than we can. Those who have followed me 
thus far through this chapter, now know that abso- 
lute cost of production has little to do directly in for- 
eign trade. But if it be true that these commodities, 
or any others whatsoever, can really be obtained by 
us by a less expense of effort through exchange than 
directly, is there a decent reason why we should 
prefer to get them by the hardest when the easiest 
way is open ? We may be assured that we shall not 
get them without being obliged to pay for them, and 
to pay for them will require a fair expenditure of 
effort and skill. If foreigners have the advantage 
over us in some things, we have the advantage over 
them in many things, and all exchange and the 
profits of it depend on relative superiority at differ- 
ent points. 

(5.) I pass to an objection much urged by Mr. 
Carey, and others, namely, that the United States, 
without the aid of protective duties, will be confined 
to agricultural pursuits, and no diversity of employ- 
ments, so essential to full social life, will come into 
play. But the truth is, diversity of employments is 



ON FOREIGN TRADE. 385 

rooted in human nature, and in the circumstances 
amid which God lias placed men, and so far is it 
from law being necessary to foster this diversity, that 
law is powerless to prevent it ! While we were col- 
onies of Great Britain, the laws were very strict 
against domestic manufacturing of almost all kinds, 
and yet long before the Revolution, the various 
branches of manufacture were introduced and prose- 
cuted in spite of the laws: clothiers' mills went up 
along the mountain streams; wool and woollens were 
exported to the West Indies and elsewhere ; iron was 
smelted and rolled and slit and plaited, and the man- 
ufacture of steel was attempted, and the germs of 
many diverse employments were expanding, notwith- 
standing the hostility of the law.^ Parliament felt 
itself called on to pass laws again and again prohib- 
iting under severe penalties these incipient manufac- 
tures, sometimes making them liable to summary 
destruction as "nuisances." As soon as a branch 
of industry becomes profitable, and suitable to the 
conditions in which a community is placed, nothing 
but extreme vigilance can prevent its springing into 
being. Men naturally, spontaneously, under the 
pressure of necessity render to each other such ser- 
vices as are in demand, and as are possible to be 
rendered in the state in which they are placed. Fos- 
ter manufactures artificially ? They will come in 
naturally and inevitably just so fast and so far as 
they ought to come in. They are as natural to men 
as agriculture. They require capital indeed, and on 
a large scale, a large capital. So does agriculture. 
Capital is the growth of time and of frugality. No 

1 See Ilildrcth, passim. 
25 



886 ELEMENTS OF POLITICAL ECONOMY. 

new society can come at once into all the forms of 
industry which adorn an old established State; there 
must be a gradual growth of capital and of skill, and 
as these increase, one branch of industry after another 
comes in, and finds a stable foothold ; and as capital 
further increases, and the rate per cent, of capital 
goes down, it becomes profitable to do many things 
which it would be sheer folly to do at an earlier 
period. When every dollar of the capital of a coun- 
try can realize a clear gain of ten per cent., is there 
any sense or reason in withdrawing a part of it into 
occupations which can only yield six per cent. ? 
" But we must have diversity," says Mr. Carey. 
Certainly, we want diversity, but only a natural, 
diversity, in which each branch can stand on its own 
legs, and not find it necessary to tax all its neighbors 
in order that its own profits may equal the average 
of theirs. The theory of a protective tariff is this : 
that certain unprofitable branches of business shall 
be cared for by the State, that is to say, the citizens 
shall be taxed to bring up the profits of these to the 
general standard of profits. Is a diversity, thus 
secured, a profitable diversity? Would it not be 
better for all concerned not to enter at present upon 
forms of industry that by confession do not pay? 
" But," urges the advocate of protection, " if they do 
not now pay, they will pay by-and-by." How do 
you know that they will? The fact that they do 
not now pay, is not of itself good proof that they ever 
will ; and at any rate, it strikes a good many people 
that it would be better to wait till that time comes, 
and to enter upon branches of industry just as fast 
as they become profitable, and no faster. 



ON FOREIGN TRADE. 387 

It seems strange to me, that Mr. Carey, whose 
general confidence in man and in nature is so justly 
strong, should find his confidence desert him just at 
this point ; should show so much impatience with a 
natural progress of diversity and association ; and 
should vehemently invoke the assistance of law to 
help on diversity within a sphere for whose general 
freedom he is a distinguished champion. He is less 
consistent than the famous charioteer, who, when his 
horses ran away down the hill, trusted in Providence 
until the breeching broke, and then gave all up for 
lost. Mr. Carey trusts in Providence, and does well; 
but all at once, when to other passengers as clear- 
sighted as himself there are no signs of anything 
giving way, he shrieks out that the breeching is 
breaking, Providence is inadequate, we must have 
recourse to Protection. 

The idea that the United States, with a greater 
variety and abundance of natural resources than any 
other country on the globe ; with an industrious, and 
enterprising, and skilful people; with mountain 
streams which leap to the wheels of industry with a 
song ; with forests and coal-fields, and mines ; with 
marts and markets, and navigable lakes and rivers; 
with a genius for traffic, and a keen eye to profit, — 
the idea that the United States is to be reduced to a 
mere farming country, unless government can be 
coaxed to tax foreigners and citizens in behalf of 
some branches of manufacture which are asserted to 
be otherwise unprofitable, — is too ridiculous for 
serious refutation. Why, no nation of the earth has 
such facilities for manufacturing: the raw materials 
are here ; the food is here in abounding measure ; the 



388 ELEJIENTS OF POLITICAL ECONOMY. 

instruments are here in water, wood, and coal ; cat- 
tle and horses and pastures are here ; everything is 
here which a nation can ask for with which to pro- 
duce either directly that which is wanted, or directly 
that with which to purchase at the cheapest rates 
what is wanted from abroad ; and if God shall give 
us grace to mind our own business, to avoid entan- 
gling alliances with our neighbors, and unnatural 
wars with foreigners, to rise above the silly jealousies 
which have hitherto restricted trade, we shall yet be 
the beehive of the nations, the chosen home of the. 
industrial and civilizing arts. 

(6.) But Mr. Carey endeavors to discover a dis- 
tinction between commerce and trade. He says: 
" The words commerce and trade are commonly re- 
garded as convertible terms, yet are the ideas they 
express so widely different, as to render it essential 
that their difference be clearly understood. All men 
are prompted to associate and combine with each 
other, — to exchange ideas and services with each 
other, — and thus to maintain commerce. Some men 
seek to perform exchanges for other men, and thus to 
maintain trade." ^ This attempted distinction plays 
a very important part in Mr. Carey's system ; he is 
returning to it perpetually ; and according to it, com- 
merce increases as trade declines, the trader is a foe 
alike to commerce and society, and lives " by appro- 
priation," and restrictions ought to be laid on trade 
in order " to establish perfect freedom of commerce 
throughout the world." He complains that hitherto 
"commerce has been sacrificed at the shrine of trade." 
Now, I have no hesitation in affirming that this for- 

1 Social Science, Vol. I. p. 210. 



ON FOREIGN TRADE. 389 

midable looking distinction is for the most part desti- 
tute of any basis of difference. Let us examine it. 
They who exchange services with each other, says 
the distinction, practise commerce, w^hile they who 
perform exchanges for other men are mere traders. 
The distinction is made to turn on the ownership of 
the services exchanged : if the principals exchange 
for themselves, that is commerce ; if they employ 
agents to do it for them, that is trade; if a merchant 
freights his own ship with his own goods and takes 
theni to a foreign port, and takes care to exchange 
there with real owners only for what he wants in 
return, that is commerce; but if he employs a super- 
cargo to manage his sales and returns, then it is trade. 
If a middle-man buys the cargo outright, and sells to 
another middle-man on the other side who is real 
owner of the return services, that is commerce under 
the detinition ; while in domestic exchanges all bar- 
gains mediated by employees is trade under the defi- 
nition. This, to say the least of it, is putting a fine 
point on commercial transactions ; and, so far as I 
can see, is totally irrelevant in a general doctrine of 
exchanges. Exchange is exchange, and the laws of 
exchange and the profits of exchange remain unaf- 
fected by any such distinction. Qui facit per alium 
facit per se. If I employ an agent to do any portion 
of my business for me, it is because I think it profit- 
able to do so, and there is an exchange of services 
between him and me for that purpose, but the ex- 
changes which he effects in my name as principal 
are in nature the same as if I effected them myself. 
If Mr. Carey wants to say that exchanges would be 
more profitable if there were no costs of carriage, no 



390 ELEMENTS OF POLITICAL ECONOMY. 

clerk hire, no intermediate services of any sort, there is 
nobody to dispute with him ; but since exchanges can- 
not be carried on to any extent without these agen- 
cies, what is the use of quarrelling with Nature and 
Providence ? The transporter is just as much of a 
producer as the grower or transformer, — he renders a 
valuable service, and must be paid for it of course. 
As soon as his services can be dispensed with, and no 
loss accrue, they will most assuredly be dispensed 
with ; but to say that people shall not employ such 
an agent if they think their interests subserved by 
employing him, can hardly be reconciled with any 
adequate notions of freedom or of exchange. All 
sorts of services are in order in exchange. All sorts 
of talent are available. If a man has not capital to 
do business for himself, let him begin by doing busi- 
ness for others. If a man can furnish a ship, but 
cannot freight her, there is no mortal objection to his 
furnishing a ship. Let the merchant freight her, and 
let them divide profits on the return. If a distinction 
between commerce and trade be allowed, for which 
I see no ground whatever, each, at any rate, is swal- 
lowed up in the higher unity of exchange, and be- 
comes amenable to the principles already unfolded. 

It is in this connection, that Mr. Carey exalts the 
policy of Colbert, the famous finance minister of 
Louis XIV., who certainly did much for the prosper- 
ity of France, and well deserves the fame which pos- 
terity is so ready to accord. But to refer the immense 
industrial impulse which France received at that time 
in any considerable degree to the restrictive duties 
laid by Colbert on foreign trade, is an instance,, by 
no means single in Mr. Carey's books, of a fallacy 



ON FOREIGN TRADE. 391 

called by the logicians post hoc ergo propter hoc. It 
is most unsatisfactory and illogical to be told that 
one thing came after another and therefore was 
caused by it. Colbert did many things much better 
worth the doing than to lay prohibitory duties. He 
swept away, so far as lay in his power, all the obsta- 
cles to the freest interchange of commodities within 
the realm of France. He abolished the interminable 
internal tolls and duties. He simplified and reduced 
the taxes. Says Henri Martin, — " "We are struck 
with admiration to see Colbert begin by reducing an 
impost thirty-three per cent., on the increased product 
of which he founded in great part his hopes. Tram- 
pling on the routine of the exchequer, he had com- 
prehended that consumption increases in equal or 
even greater proportion to the abasement of duties 
that weigh on consumable objects, and that the pub- 
lic treasury does not lose what the well-being of the 
people gains." ^ He abolished superfluous offices, and 
introduced economy, and, as far as possible, honesty 
into every department of the State. He emancipated 
the Communes from their old burdens, and forbade 
their incurring new debts. He renovated the whole 
industrial and financial system; and France began 
mightily to prosper. But he was also in parr, un- 
fortunately, a disciple of the mercantile system. He 
laid heavy duties on foreign goods, which of course 
provoked foreigners to lay similar duties on the prod- 
ucts of French industry. Martin himself, with whom 
Colbert is a hero, acknowledges this consequence, 
li has never been proved, and never can be, that the 
high duties contributed to the then prosperity of the 

1 History of France. 



392 ELEMENTS OF POLITICAL ECONOMY. 

French ; the weight of bare authority is about evenly 
balanced on the question ; but he who follows reason 
and science in the premises will not hesitate in his 
decision. 

(7.) Mr. Erastus B. Bigelow of Boston published 
in 1862 a quarto volume, entitled " The Tariff Ques- 
tion, considered in Regard to the Policy of England 
and the Interests of the United States." About a 
hundred pages of this volume are letter-press; and 
the remaining hundred and fifty contain statistical 
and comparative tables, designed to illustrate and 
confirm the positions taken in the text. 

Mr. Bigelow is an inventor, and as such deserves 
well of the country and of the world. He has in- 
vented a power-loom for the weaving of two-ply and 
three-ply carpets, — a mechanical feat, which, before 
he accomplished it, had been pronounced an impossi- 
bility. In consequence of his inventions and im- 
provements the carpet manufacture in this country 
has received a vast expansion, — fabrics which before 
were produced from hand-looms at the rate of 3 to 
8 yards per day being now produced of better quality 
from the power-loom at the rate of 18 to 80 yards 
per day. Lowell and Clinton in Massachusetts, 
Thorasonville and Tariffville in Connecticut, have 
had flourishing carpet establishments under the Bige- 
low patents. 

As these tabular statements and statistics make 
up much the larger part of Mr. Bigelow's book, so 
they constitute also its most valuable part ; and as I 
propose in these paragraphs to make some strictures 
upon the arguments and positions of the book, I wish 
to acknowledge, at the outset, in the amplest man- 



ON FOREIGN TRADE. 893 

ner, the accuracy and value of these statistics. Some 
of them were compiled, with great labor, from sources 
that are inaccessible to most people, and the whole 
together make up a set of tables exceedingly valuable 
for reference. 

Let My. Bigelow state his fundamental position in 
his own words : " Let it be understood, then, that the 
protective policy here advocated, is not a policy that 
seeks to favor a particular interest at the expense of 
some other interest, or which would build up one 
section of the country to the detriment of other 
sections. A scale of duties which should place our 
manufacturers on a level with their competitors in 
countries whose wages and interest are lower and 
capital more abundant than with us, could have no 
effects nor tendencies which would not be beneficial 
to all classes and to the whole nation. In the selec- 
tion of objects there would be need, certainly, of a 
careful discrimination. It is clearly unwise to foster 
by legislative aid any branch of industry or business 
for the prosecution of which our natural advantages 
are decidedly inferior. Some strong and peculiar 
necessity can alone justify such a course. But in 
regard to all those pursuits for which we have the 
requisite endowments, and need only the acquired 
advantages of capital, skill, and position, in order to 
compete successfully with other nations, I hold it to 
be not only proper but necessary that so much of 
governmental aid shall be afforded as will raise our 
industry to a footing of equality. To do this effect- 
ually, our duties should be so established as not only 
to meet and equalize the differences just mentioned, 
but also to counteract that occasional application of 



394 ELEMENTS OF POLITICAL ECONOMY. 

foreign capital by which our market is sometimes 
designedly flooded with cheap goods, at a loss it is 
true, to the producer, but wuth still greater damage 
to some struggling manufacture of our own, if not 
indeed to its utter prostration." 

Let us look for a moment at this passage. In the 
first sentence he disclaims " advocating a protective 
policy that seeks to build up a particular interest at 
the expense of some other interest." But, unluckily, 
he fails to tell us anywhere in his book how that 
thing can be done, — how a particular interest can 
be fostered by protective dutie's except at the expense 
of other interests. Who pays the enhanced price 
caused by the duty ? Clearly, all consumers pay it. 
This is universally admitted. Mr. Bigeiow does not 
deny it. Unless then, it can be shown that the 
enhanced prices of commodities are paid at nobody's 
expense, that the consumer pays two dollars as easily 
as one, then it is in vain to talk about a protective 
policy that fosters one interest without depressing 
others. It is an omission fatal to his argument, that 
our author does not show how this financial miracle 
is wrought. We cannot indeed blame him for not 
showing what is impossible to be shown, but we do 
blame him for bringing forward an argument the 
whole validity of which depends on one premise, 
without attempting to prove that premise. This 
proof is- utterly wanting in the book before us. The 
argument falls therefore of itself to the ground. It 
is an easy thing to say : " Let us have a protective 
tariff here that shall stimulate artificially certain 
branches of industry, and nobody be any the poorer." 
Is it impertinent for us to require of those who say 



ON FOREIGN TRADE. 395 

this, that they shall tell us how these branches of 
industry can be thus stimulated and nobody be any 
the poorer? 

But the second sentence is still more extraordinary. 
It contains the surprising assertion that a scale of 
•high restrictive duties "could have no eflfiects nor 
tendencies which would not be beneficial to all classes 
and to the whole nation." Let us look at some of 
these « effects and tendencies," and see if they be so 
universally beneficial. First, commerce is lessened 
by the restriction. Some people who used to come 
to your shores to trade, to bring their surplus products 
and to take off yours, no longer come. You have 
flung your fist into their face, and they prudently stay 
away. In consequence, those home commodities you 
formerly exchanged with them no longer find a mar- 
ket, that is, their best and freely chosen market. 
Perhaps they do not find a market at all. Home 
labor is so far discouraged, and home products are 
so far less valuable. Is there anything in this bene- 
ficial " to all classes and to the whole nation " ? 
Again, your action leads the other nation to adopt 
or perpetuate similar restrictions. You are thrust 
from her ports just as you thrust her from yours. 
You fail to get her commodities which you formerly 
enjoyed. There are fewer exchanges here, and fewer 
exchanges there. Commerce thus receives a double 
blow, first on one cheek, then on the other. Is there 
anything in this " beneficial to all classes and to the 
whole nation"? Furthermore, in consequence of 
these restrictions, the prices of all commodities that 
are exchanged, stand at a much higher figure, and 
every consumer must pay these enhanced prices. Is 



396 ELEMENTS OF POLITICAL ECONOMY. 

there anything in this beneficial to all classes and to 
the whole nation ? The truth is, this assertion is 
very loose, and very wide of the facts, and Mr. Bigelow 
would find it difficult to justify his language to in- 
telligent and candid people. 

But besides this the sentence under review contains 
a fallacy which has been again and again exposed, 
but which deserves another faithful exposure, and 
shall receive it. We must have a restrictive tariff, 
says Mr. Bigelow, because other nations have a 
lower rate of wages and interest, and more abundant 
capital than we. But it is fair to presume that Mr. 
Bigelow knows that foreign trade depends only very 
remotely on the absolute cost of the articles ex- 
changed. It is relative efficiency, not absolute, that 
determines foreign trade. If any person does not 
know this, then he is ignorant of the one funda- 
mental proposition of commerce, and his reasoning, 
as a matter of course, cannot reach correct conclu- 
sions. If, on the other hand, a writer be familiar 
with this fundamental proposition, he should see that 
any reference to lower wages and lower interest of 
money is, in this connection, entirely irrelevant. It 
is a matter of indifference to us what the goods we 
buy from abroad cost their producers, whether they 
paid high wages or low wages, high interest or low in- 
terest ; we do not care about the absolute cost of pro- 
duction of anything we buy ; the question of interest 
for us is how much of the home commodity must 
we give for it, and what does the home commodity 
cost us. The simple question that determines foreign 
trade is this, — would the commodity, if produced here, 
cost more than that commodity with which we buy 



ON FOREIGN TRADE. 397 

it? If it would, then we profitably import it; and 
this, without any reference to its cost to the foreign 
producer. Whether he pays high wages or low 
wages, high interest or low interest, whether capital 
is abundant there or scarce, has little to do with this 
question of a profitable exchange of commodities, 
and justifies, in no conceivable manner, the restrict- 
ive system. California has much higher wages and 
a much higher interet^t than New England ; does she 
need, therefore, to prohibit New-England ships from 
entering the Golden Gate ? Is it for her interest to 
put restrictions on New-England goods? Does New 
England, because wages are lower here, get more than 
her share of advantage in the California trade ? If 
not, no more would England or India in a trade with 
us. We trade with all the world : some parts have 
a higher rate of wages and interest than we ; some 
parts have a lower rate ; so far as that matter is con- 
cerned our trade may be equally advantageous with 
them all. 

To this law of foreign trade there is, however, 
a single not unimportant exception. When two 
nations go into the market of the world with the 
same commodity, to buy gold and silver, then the 
absolute money-cost of that commodity is, as 
between the two, an important question. That one 
of the two nations whose wages are lower, and 
whose rate of interest is less, in the manufacture of 
the common commodity will, in a trade for gold, 
under-sell the other — that is, can afford to give more 
of its commodity for an ounce of gold, because its 
commodity has cost less in gold. This is clear, and 
it is the only case where foreign trade is determined 



398 ELEMENTS OF POLITICAL ECONOMY. 

by the absolute cost of production. But our author 
can get no crumb of comfort here ; for in the first place, 
the commerce of the world is not a commerce for 
gold and silver, but a commerce of commodities, in the 
exchange of which relative cost is the only principle. 
And in the second place, when two nations go into 
the market of the world for gold, they rarely carry 
the same commodity, but carry, each its own pecu- 
liar commodities, in the production of which it has 
the greatest advantage. They have a strong motive 
to do this always, for that which they have the 
greatest advantage in producing will buy all other 
commodities, gold included, at the cheapest rate. 
Here too the relative cost decides. And in the third 
place, if two nations do carry the same commodity 
into the same market to buy the same gold, and the 
nation whose wages and profits are higher is thereby 
at a disadvantage in the trade, how is a restrictive 
tariff at home to help that matter? The true remedy 
is to cultivate our own peculiar advantages to the 
highest point, and carry those commodities abroad 
to buy our gold, and not endeavor to compete with 
our neighbor in the same commodity. High wages 
and high profits are a vast national advantage ; re- 
strictive systems tend certainly to reduce them ; but 
shall we throw away a great advantage enjoyed by 
all laborers and all capital in all departments, in order 
to compete with less fortunate nations in a single 
trade with a single commodity ? The folly of this is 
patent ; especially as the United States is a gold- 
producing country, and not only supplies herself with 
gold, but half the world besides. All this talk there- 
fore about high wages and high profits putting us at 



ON FOREIGN TRADE. 399 

a disadvantage in foreign trade, and making restric- 
tion necessary, is moonsliine of the purest sort, — is, 
in every case, irrelevant. 

In the next sentence of the extract quoted, Mr. 
Bigelow really, though unconsciously, concedes to us 
the whole question in disjDute. " It is clearly un- 
wise," says he, " to foster by legislative aid any 
branch of industry for which our natural advantages 
are decidedly inferior." But if our natural advan- 
tages are not decidedly inferior, why do we need any 
legislative aid at all ? Or, to translate this euphoni- 
ous expression "legislative aid" into plainer English, 
why should everybody be taxed to maintain a branch 
of industry whose natural advantages are not in- 
ferior ? 

If the natural advantages are inferior, it is clearly 
unwise to protect, says Mr. Bigelow ; but if the 
natural advantages are not inferior, what is the need 
of protection ? 

What hinders the establishment of a branch of 
industry in any country whose natural advantages 
for that branch are not inferior? Clearly two things 
can hinder it: lack of capital and lack of skill. If 
all the capital of the country is now taken up by 
branches of industry already existing, of what advan- 
tage is it to introduce a new branch which can only 
come into being at the expense of the old by with- 
drawing capital from the old ? The capital is already 
taken up. Let it abide in its freely chosen channels. 
If the capital of the country is not all taken up, then 
certainly new branches of industry will come in, will 
come in of their own accord ; you cannot keep them 
out. Every kind of business, which, under present 



400 ELEMENTS OF POLITICAL ECONOMY. 

circumstances, is profitable, will be carried on, and 
those that are not profitable we do not want. 

If the restrictive system could increase the capital 
of a country, then it might with some show of reason 
be defended, but it would be a difficult task, I think, 
to show how the capital of a country can be increased 
by stopping a profitable commerce. 

And just so of skill. If the new branch of manu- 
facture for which skilled labor is wanted is carried on 
abroad, the laborers can be easily imported. An 
assurance of higher wages and constant employment 
has brought and will bring again skilled laborers from 
every country in Europe. Restriction cannot give 
us skill, since all experience has shown, and common 
sense testifies to the same point, that skill will be 
best developed under the freest competition — under 
circumstances where everything depends on relative 
skill, rather than where very little depends on it; 
where a high price, artificially created, is sure, whether 
skill be exercised or not. The sharp spur of emula- 
tion added to the keen impulse of interest, will most 
assuredly carry skill to its highest point. Since, 
then, Mr. Bigelow would not employ protection 
where natural advantages are inferior, and since 
where they are not inferior the only obstacles to 
new branches of business are the want of skill and 
capital, which skill and capital restriction has no ten- 
dency to increase, where is the ground for protec- 
tion at all? 

In the last sentence quoted Mr. Bigelow betraya, 
what is indeed betrayed in various parts of the book, 
that he had never studied with sufficient care th6 
nature of commerce in its simple elements. It would 



ON FOREIGN TRADE. 401 

have saved him, as I think, from some mistakes, and 
from many fallacies, if he had thoroughly reflected 
that commerce is nothing but an exchange of com- 
modities for commodities for the mutual advantage 
of the parties, and that exchange is always a recipro- 
cal act; when a man sells he buys, and wheh he buys 
he sells. If a foreigner brings goods to our shores he 
always carries away in effect a corresponding value 
from our shores. He sells to us, and in the very act 
he buys from us : we buy from him and in the very 
act sell to him. It is a reciprocal act. The only 
motive he has to bring anything hither is that he 
may carry something hence. When therefore Mr. 
Bigelow says in the sentence referred to, that for- 
eigners will sometimes, as he expresses it, " flood our 
markets with cheap goods at a loss to themselves, for 
the purpose of strangling some business of ours," he 
holds up a bugbear, which, I am inclined to think, 
under the laws of commerce and the laws of human 
nature, never could become a reality. Certainly 
until some well-authenticated case is given of for- 
eigners w4io were willing to submit to a present and 
positive loss in the hope of a gain uncertain, prob- 
lematical, and future ; until some well-authenticated 
case is given of a rising manufacture, adapted to our 
circumstances and profitable in itself, being ruined in 
this way ; until a well-authenticated case is given of 
a magnanimous manufacturer sacrificing his present 
gains for a future and uncertain benefit to accrue to 
his fellow-manufacturers, freighting ships to America 
to bring nothing back, — until the case is given, I shall 
beg leave to think that a thing so contrary to the 
interests of capital, to the laws of trade, and even to 

26 



402 ELEMENTS OF POLITICAL ECONOMY. 

the principles of human nature, has not occurred in 
the past, and is not likely to in the future. 
. (8.) One further objection to free trade remains 
to be briefly considered. It is this, and it has been 
urged with some plausibility and much pertinacity, 
namely, ftiat every nation ought to be independent 
of others in all the more essential articles of life ; 
and therefore protective duties ought to be laid in 
order to compel the nations to make or grow all the 
articles of prime necessity for themselves. The ob- 
jection divides itself into two parts, the postulate 
and the inference, and it shall be considered in that 
order and relation. First, every nation ought to be 
independent of others in respect to the supply of its 
more necessary wants, such as food, clothing, means 
of defence and offence, and so on. But what is it 
to be independent? I suppose it means, in this 
connection, to be sure of getting what is wanted 
under all contingencies. But is an individual man 
to be regarded as "dependent," and as likely to 
lose his bread, unless he devote himself to the grow- 
ing of food directly? If he only has wherewithal 
to buy food, I take it that he is just as " independ- 
ent," just as likely to get it, as if he produced it 
himself; and so a nation which has products to 
offer which are in demand in the w^orld without, is 
very sure of getting whatever it wants, provided it 
is anywhere to be bought, and is, in my apprehen- 
sion of it, in a very " independent " position. Pro- 
tectionists have degraded language and degraded 
exchange by trying to make it appear that a man 
and a nation are reduced to conditions of depen- 
dence whenever they find it for their interest to buy; 



ON FOREIGN TRADE. 403 

but the truth is that there is nothing dependent in 
buying and selling; the parties stand on a footing 
of perfect equality towards each other; each is at 
the same moment buyer and seller; one is as inde- 
pendent as the other, and nobody can be more so 
than either, except the savage and the hermit, who 
live in a state of isolation. Moreover, every nation 
does of course devote itself directly to the supply of 
its principal wants, and always continues to do so, 
unless it appears that it can supply those wants 
more cheaply through exchange. If it can supply 
them more cheaply through exchange, it becomes, 
in my judgment, more "independent" by doing so; 
more independent of irksome effort, and more sure 
of getting its wants supplied, since now it draws its 
supplies from a wider surface, from any point in the 
wide world where such supplies are to be had and 
where its own products are in demand. So far as 
food is concerned, this objection sounds but poorly 
in the mouths of protectionists, who are the men 
perpetually bemoaning the prospect that every na- 
tion, unless it follow their advice and lay protective 
duties, will be exclusively agricultural. 

But the inference is even less defensible than the 
postulate. Let it be admitted, for argument's sake, 
that to buy is to be dependent, and that every nation 
loses a part of its independence by every act of for- 
eign exchange by which it obtains its necessary 
supplies; does it follow that protective duties are 
the true remedy? No. Prohibition is the barrier to 
hold up before the waning independence of the na- 
tion. Why allow a thing to go forward under more 
onerous conditions, which under less onerous was 



404 ELEMENTS OF POLITICAL ECONOMY. 

proving fatal to independence ? If for the citizens 
to import freely be so disadvantageous to their inde- 
pendence, how disastrous must it be to have the 
importations still go forward under a tax in addi- 
tion, M^hich the citizens must pay ! 

The late insurgent States of this country furnish 
a capital illustration of the fact that war and a 
stringent blockade cannot prevent exchanges from 
going forward, when there is wherewithal at home 
to pay for goods, and goods abroad which are 
wanted at home. The United States maintained 
a thousand vessels, more or less, along the coast 
of the insurgent region, to intercept all trade ; but 
there was cotton within which the English wanted, 
and goods without which the insurgents wanted, 
and the exchanges went on, with great hazards and 
frequent losses indeed, but went on for four years, to 
an immense amount of transactions. 

It is always pleasant to be able to confirm one's 
reasonings with facts, to clench the nail driven home 
by a logical process, with a blow or two from the 
hammer of actual experience. It is fortunately pos- 
sible to do this in regard to free trade. All the 
leading commercial nations, the United States alone 
excepted, have been relaxing of late years their com- 
mercial systems : the United States decidedly re- 
laxed hers in 1846, and again in 1857, but in 1861, 
alone of nations, and in the face of principles, she 
took the back track, and prejudiced thereby as well 
the revenue, which we have sorely needed in our 
time of trial, as the cause of Freedom itself, which 
was represented by rebel emissaries abroad as of a 
piece witli the craft which so little appreciated the 



ON FOREIGN TRADE. 405 

dawn of an era of universal freedom as to mark its 
opening by a restrictive and irritating tariff. 

England many years ago abandoned for substance 
the doctrine of protection, but only within a decade 
did she abolish the last vestige of the system in the 
discrimination till then maintained in favor of her 
own ships over those of foreigners in her own ports. 
There is nothing now to hinder American ships 
from competing on equal terms with English ves- 
sels in the coastwise carrying-trade of England 
itself. The English tariffs are adjusted with a view 
to revenue merely; and in the late special commer- 
cial treaty with France, the duties were thrown off 
entirely from a portion of French manufactures, and 
materially reduced on most of the rest. England 
claims, through the mouth of her responsible min- 
isters and statesmen, to set before the nations an 
honest example of free trade; and invites them, as I 
believe, in good faith, to follow her in the path which 
she has opened up for herself. The fofce of this ex- 
ample is frequently sought to be parried by alleging 
that England reached through protection a poiiit of 
prosperity at which she was well able to dispense 
with protection. This is neither ingenuous nor true; 
since the men who have persuaded the English gov- 
ernment to abandon the principle of protection, are 
the men who have demonstrated the economical 
folly of the principle under all circumstances; and 
have shown that England maintained the policy so 
long at a loss to herself as well as her neighbors. 
Other nations can say, if they please, " We will 
maintain protection as long as England did, and 
then follow her example in giving it up."« But if 



406 ELEMENTS OF POLITICAL ECONOMY. 

they do this, they will do it at a loss, as England 
did, and too late bemoan their folly, as England 
does. Said Mr. Gladstone, Chancellor of the Eng- 
lish Exchequer, in 1856, — " There is one domestic 
feature which I wish it were in our power effectually 
to exhibit to the governments and inhabitants of for- 
eign countries. They know by statistics, which are 
open to the world, the immense extension which our 
commerce has attained under and by virtue of free- 
dom of trade, and the great advancement that has hap- 
pily been achieved in the condition of the people; but 
they do not know what it has cost us to achieve this 
beneficial, nay, blessed change; what time, what 
struggles, what interruptions to the general work of 
legislation ; what animosities and divisions among 
the great classes which make up the nation ; what 
shocks to our established mode of conducting the 
government of the country ; what fears and risk, at 
some periods, of public convulsion. These were the 
fine and penalty we paid for long- adherence to folly. 
We paid this fine and penalty upon returning to the 
path of wisdom, which too late we wished we had 
never left. It is not easy to calculate its amount, 
but if it could be exactly reckoned, and fully ex- 
posed to the eyes of other nations, our juniors in 
trade, it might supply them with a timely warning 
against imitating our former errors, and with the 
best encouragement to the adoption, before they 
become entangled in the creation of artificial inter- 
ests, of our recent and better example." 

But it is said, as if that were sufficient to con- 
demn free trade, that England adopted it out of 
pure selfishness. Of course she did ; and other na- 



ON FOREIGN TRADE. 407 

tions will also adopt it from the same motive. No 
other motive is appropriate in the premises. The 
idea, disseminated by protectionists, that it requires 
a millenium for free trade to work in, is wholly falla- 
cious ; it requires an enlightened selfishness, and 
nothing more; and it is one of the grand wonders 
of Providence, that the elements of society are so 
wisely prearranged, that, within the sphere of ex- 
change, the welfare of all is promoted through the 
enlightened selfishness of each. Trade is always self- 
ish, just as much so under freedom as under protec- 
tion; it is a sphere all whose operations are subject to 
the legitimate control of conscience, but it is not, and 
never was designed to be, a sphere of sympathy and 
benevolence: these have a sphere of their own, above 
and beyond the sphere of exchange. When a man 
gives, let him give, and enjoy the luxury of doing 
good ; when a man buys and sells, let him honestly, 
but with an eye to self-interest only, buy and sell 
and get gain. 

The Zoli- Verein, or Revenue-Union of the German 
States, presents a splendid example of the pros- 
perity which follows in the train of free exchange. 
The system commenced with Prussia in 1818, and 
has been gradually extended by the voluntary accep- 
tance of it on the part of all the German States, 
except Austria, the free cities of Liibeck, Hamburg, 
and Bremen, and two or three of the small northern 
duchies. All interior custom-houses and barriers 
are swept away within the territory included in the 
Zoll- Verein ; and a series of duties, not to exceed in 
any case ten per cent, ad valorem are laid on foreign 
manufactures, of which nothing is prohibited, the 



408 ELEMENTS OF POLITICAL ECONOMY. 

proceeds going into a comnaon treasury, and then 
distributed among the various members of the union 
on the basis of their population. The rate of im- 
posts on foreign goods is varied from time to time 
by the Zoll-Verein Congress, but ten per cent, is the 
maximum, and the interests of the revenue are con- 
sulted in adjusting the rates below that: since 1851 
the raw materials coming from abroad are admitted 
free, or nearly so. Whether these facts justify Mr. 
Carey in regarding the Zoll-Verein as affording an 
example of protective duties, the intelligent reader 
must judge. I call these conditions, under which 
34,000,000 of people are allowed to trade with abso- 
lute freedom among themselves, and with all the 
world outside at rates never exceeding ten per cent., 
very free conditions of trade ; and if Mr. Carey is 
content that such rates as these, which he calls 
" protective," should be established for the United 
States, where at present the average rate on duti- 
able foreign goods falls scarcely if at all below fifty 
per cent, nobody will quarrel with him about the 
word. Germany is prosperous beyond all precedent 
under the stimulating influence of free exchange. 
Every State, without exception, now receives a larger 
revenue than it did before it joined the Zoll-Verein, 
and the production of the great staples of industry 
has prodigiously increased. The production of iron 
increased from 3,708,432 cwt. in 1850, to 10,207,098 
cwt. in 1858; and the importation of foreign iron 
increased within the same dates from 2,455,000 cwt. 
to 6,587,000 cwt.; an interesting proof that the free 
introduction of foreign articles does not depress, but 
rather stimulate, the production of the same articles 
at home. 



ON FOREIGN TRADE. 409 

I have dwelt the longer on this question of free 
trade, because it is a practical one now in this coun- 
try, for whose right solution every citizen should be 
anxious. Some additional light will be thrown upon 
the subject in each of the three remaining chapters. 



410 ELEMENTS OF POLITICAL ECONOMY. 



CHAPTER XIV. 

ON THE MERCANTILE SYSTEM. 

There have been three epochs in the progress of 
the science of Exchange. Each of these has been 
marked by a theory of its own, of which the two 
earlier were radically incorrect, yet prepared the way 
for the third and true system. We have already 
sufficiently considered the first of these theories, 
which assumed that gold and silver are the only 
wealth, and, consequently, that the only way for a 
nation to grow rich was to foster the importation 
and prohibit the exportation of the precious metals. 
The second commercial theory was more refined 
and complicated; we have already spoken of it as 
the Mercantile System, and partially explained its 
fundamental principle. The principle was to pre- 
serve the balance of trade, to make the exports 
greater than the imports, so that the balance should 
come back in gold and silver. The whole system is 
based on the absurd supposition that a merchant 
will carry abroad goods worth at home a certain 
sum, merely that he may bring back goods and 
money worth as much. Why, on that principle, 
should he carry forth goods at all ? 

The nature of trade, as mutually advantageous, 
was not understood. After every fair mercantile 
transaction, both parties are richer than before. The 



ON THE MERCANTILE SYSTEM. 411 

more genuine exchanges there are between two 
countries the better, because the motive for an ex- 
change is always and everywhere the nnutijai inter- 
est of the parties. The benefit of the exchange is 
shared by both, otherwise there would be no ex- 
change. 

But the Mercantile System led each nation to 
suppose, that, by manoeuvre and finesse, it could 
obtain more than its natural share of advantage. 
England, for example, in her trade with France, 
found that, by natural tendency, she bought as much 
of French wines and silks as she sold France of 
hardware and woollens. Instead of being satisfied 
with a legitimate and mutually advantageous trade, 
the English, under the promptings of the Mercantile 
System, say, " This will never do. This will never 
do. There is no balance in our favor. We must 
sell to France more than we buy of her, or ehe we 
get no balance of trade." Accordingly restrictions 
are laid on some French goods. Their introduction 
is either prohibited, or heavy duties are levied on 
them, in order to lessen the quantity imported. This 
is done in the hope of selling to the French as much 
as before, but of buying less, this is, less French 
goods; so that the difference must be paid in gold 
and silver. 

All that was mighty well! But unfortunately the 
gold and silver, even if they should get it, was no 
whit better than the French goods, and would prob- 
ably go right back to France in the purchase of such 
goods. And unfortunately also the French were 
adepts in the Mercantile System ; they wanted a 
favorable balance too. They must sell more than 



412 ELEMENTS OF POLITICAL ECONOMY. 

they buy. Their exports must exceed their imports. 
Why not? And accordingly they prohibit some 
species of English goods, or burden them with a 
heavy duty : the English retaliate by new restric- 
tions on the products of French industry, and are 
again in tm-n retaliated upon. Thus they go on 
tinkering and tormenting trade in the vain hope of 
some imaginary balance ! 

Because England and France are adjacent, and 
because their natural productions and acquired in- 
dustry are so very diverse, they are naturally to an 
immense extent mutual buyers and sellers. France 
is gifted, perhaps as much as any country upon 
earth, in point of soil, climate, and natural produc- 
tions. She produces with the greatest facility, and 
in the greatest abundance, wines and the cereal 
grains ; and has unusual advantages also for the 
culture of the mulberry and the manufacture of 
sHk. 

England is not thus blessed by Nature ; but she 
has freedom, and industry, and energy, and skill ; 
these have made her for centuries the greatest man- 
ufacturing and commercial country in the world. 
She has always had those things to sell which 
France wanted to buy, and has always wanted to 
buy those things which France has had to sell. Ex- 
changes between two such countries are natural and 
inevitable. If the governments undertake to forbid 
them, then the business will be done by smugglers, 
though with hazard and loss. 

Now, the Mercantile System disturbed and well- 
nigh destroyed this natural and profitable trade. 
To be sure, England could buy her wines of France 



ON THE MERCANTILE SYSTEM. 413 

much cheaper and of better quality than of Portu- 
gal ; but then, the balance of trade with France was 
supposed to be less favorable than with Portugal; 
and therefore the French wines were prohibited, 
and the monopoly of supplying the English market 
was given to the Portuguese. The English drank 
poorer wines at a greater expense. If this were all, 
it would not have been so bad; but the French, to 
retaliate and to restore the balance, prohibited Eng- 
lish woollens. Thus the English were not only 
obliged to regale themselves on poor wine at a high 
price, but to lose an excellent market for woollen 
goods. The French lost not only the best market 
for their wines, but must purchase their woollens 
elsewhere at an enhanced cost. It was a dead loss 
all round — a gratuitous loss without any compen- 
sation whatever. 

So far has this regulating mania been carried at 
times, that almost all legitimate commerce ceased 
between the two countries. Adam Smith tells us 
that, in his time, that is less than a hundred years 
ago, smugglers were the principal importers of Brit- 
ish goods into France, and of French goods into 
Britain. So reluctant was England to buy of France, 
so fully were her statesmen under the influence of 
the prejudice that the prosperity of her neighbors 
was incompatible with her own, that Parliament, as 
late as William and Mary's time, decreed that the 
French trade was a nuisance. 

(1.) This laying extraordinary restraints on the 
importation of goods from those countries with 
which the balance was supposed to be unfavor- 
able, was one device of the Mercantile System to 



414 ELEMENTS OF POLITICAL ECONOMY. 

increase the quantity of gold and silver. It was 
unfortunately not the only nor the worst one. The 
great idea was, you perceive, to discourage importa- 
tion and to encourage exportation, in order that the 
country might grow rich by the stream of gold and 
silver which, it was supposed, would pour in to pay 
the balance between the large exports and the small 
imports. 

(2.) An obvious expedient was to prohibit alto- 
gether, or to burden with very high duties, the intro- 
duction of all such goods as could be produced at 
home. If we can produce the articles at home, then 
we shall not have to import them, and that will help 
the balance. Under the influence of this feeling, 
England, damp and cold, in the very teeth of Na- 
ture's protests, undertook to rival France in the 
culture of silk. Heavy restraints were laid on for- 
eign silks, and the monopoly of supplying the home 
market was given to her own manufacturers. Cer- 
tainly, silk can be made in England, of a somewhat 
inferior quality and at a somewhat greater cost than 
in sunnier climes. To overcome these disadvan- 
tages, what was needed was the healthy stimulus of 
competition. If things had been left to take their 
natural course, and foreign silks had been admitted 
freely, the home manufacturers would have been put 
upon their mettle to discover improved processes, to 
invent machinery, to make up the disadvantages of 
Nature by expedients of Art. The plant never be- 
comes hardy and strong that does not root itself 
amid the breezes of heav.en ; so neither does a 
branch of business grow up into self-sustaining and 
vigorous life without the stimulating breezes of 



ON THE MERCANTILE SYSTEM. 415 

competition. Of this the case in hand affords an 
excellent illustration. For more than a century the 
silk manufacture of England, fenced round and 
protected, as it was called, by these restrictive and 
prohibitory duties, languished, pined, and at times 
almost expired; for Ihe simple reason that the man- 
ufacturers, instead of relying upon their own inven- 
tion, skill, and energy, looked to the government for 
support, and to an artificial monopoly; and when at 
length in 1826 this foolish system was abandoned, 
and the silk interest was told that it must look out 
for itself, and the ports were thrown open to foreign 
silk, then first the English silk culture began to 
thrive ; it has thriven from that day to this, until 
now we are told that in the plainer and firmer kinds 
of silk the English surpass the French, and that 
there is a considerable exportation of these English 
silks into France itself. 

As an illustration of the mischiefs which the Mer- 
cantile System everywhere introduced into the realm 
of industry, let us look at this instance a little more 
closely. During the continuance of the monopoly, 
the English consumers of silk were obliged to pay 
a very high price for an inferior article. To whose 
benefit did this high price accrue ? It was designed 
to accrue to the benefit of the home manufacturer. 
The sole object in laying the prohibitory duties 
was to prevent importations, and to leave the home 
market entire to the home manufacturer. Precisely 
at this point we see how the whole doctrine of Pro- 
tection grew out of the Mercantile System. The 
Mercantile System wished to repress importations 
for the sake of the balance of trade ; but if needful 



416 ELEMENTS OF POLITICAL ECONOMY. 

articles cannot be imported, they must be made or 
grown at home ; and in order to be made or grown 
at home, the makers or growers must be encouraged. 
The monopoly of the home market was precisely 
this encouragement ; and it is owing to this single 
circumstance that influential classes in every mer- 
cantile community have supposed themselves bene- 
fited by this monopoly, that the doctrine of Protec- 
tion has lingered so long in the general mind. It is 
easy, however, to see that this benefit is in most 
cases wholly imaginary; and that the high prices 
paid by the consumers do not, on the whole, 
strengthen the manufacture, as has been supposed. 
If the government had gone further, and given 
those who had already commenced the culture of 
silk the monopoly against their own countrymen as 
well as against foreigners, so that nobody could 
engage in the manufacture except those already 
engaged in it, then, indeed, these would grow rich 
at the expense of their countrymen. Government 
would take money out of the pocket of every con- 
sumer of silk, and put it into their pocket, and the 
whole benefit of the high prices would accrue to 
the manufacturers alone. But governments have 
rarely gone so far as this. They have excluded for- 
eign competition, but not prohibited home compe- 
tition ; and the result has been, that the high duties 
which excluded the foreign goods, and the conse- 
quent high prices of the domestic product, have 
drawn many men and much capital into that busi- 
ness, in the hope of an extraordinary profit. The 
business has been artificially stimulated, and capital 
has been thrust into it which would not have gone 



ON THE MERCANTILE SYSTEM. 417 

of its own accord. The thing has been overdone ; 
and the feverish home competition, in its anxiety to 
reap monopoly prices, has brought down prices far 
below the paying figure. The business has col- 
lapsed from its very inflation ; and thus alternate 
chills and fever have shaken the life out of it. 

But the Mercantile System, and the restrictive 
policy that sprung from it, obtained universal cur- 
rency. The statute-books of every ng,tion in Europe 
are defaced by the absurdest laws and regulations 
respecting manufactures and commerce. It was 
ordered, for example, by an act passed in England 
in 1678, that all dead bodies should be wrapped in 
woollen shrouds ! This, you must know, was for 
the encouragement of the woollen manufacture ! 

The artisans in the cities and towns were formed 
into guilds, that is, incorporated societies, and to 
each guild was given the monopoly of the market, 
in its branch of industry. No man could practise 
the art of a shoemaker in Antwerp or London with- 
out the consent of the guild of St. Crispin ; and the 
guild itself determined the number of apprentices to 
each artisan, the years he should serve, the condi- 
tions under which he might become a master; in 
short, determined everything respecting the trade by 
constitution and bye -laws. The governments, justly 
regarding these artisans as the most industrious and 
deserving of their subjects, granted them many priv- 
ileges, which, however, were no less contrary to 
sound principles than the rest of the system. That 
they might obtain cheap provisions, the export of 
corn was forbidden ; and thus agriculture was pre- 
vented from selling its products in the best market, 

27 



418 ELEMENTS OF POLITICAL ECONOIIY. 

wherever that market might be found. That they 
might obtain the raw materials of their manufac- 
tures cheap, the export of these was strictly for- 
bidden. The tanner and currier, for example, must 
sell his product to the " gentle Craft of Leather," 
and had no other market. 

The general doctrine of fostering exportation was 
infringed on in these instances, because it was 
thought that there would be a greater ultimate ex- 
port of manufactured products, if the raw materials 
of these were forbidden to be exported, and cheap 
provisions were secured to the artisans. 

In order to encourage agriculture, most European 
countries, in accordance with the doctrines of the 
Mercantile System, passed corn-laws forbidding the 
importation of foreign grain, each nation wishing to 
raise its own subsistence from its own soil. The 
consequence of this was that the landholders secured 
the monopoly of supplying the home market with 
food ; which of course greatly enhanced the price to 
all consumers, especially in times of scarcity. The 
increased price of bread, which rich and poor must 
pay alike, was but a part of the evil consequences. 
No nation is so sure of its subsistence, when it en- 
deavors to raise the whole of that subsistence at 
home, as when it leaves the channels of importation 
open for foreign supplies. When the trade in corn 
is free, the dearth in one country is instantly sup- 
plied by the superabundance of another, and that 
by natural laws as beautiful and invariable in their 
operation as the laws that govern the heavenly 
bodies. Interference with natural law in no direc- 
tion is so mischievous and culpable as in this. Is it 



ON THE MERCANTILE SYSTEM. 419 

not plain to common sense that that nation is most 
likely to obtain its food with regularity and in plenty 
which draws its supplies from the widest surface? 
Massachusetts, for example, does not begin to feed 
its own population ; but does any one suppose her 
people are anymore likely to starve on that account? 
She can buy food with the products of her industry. 
Her calicoes and cassimeres, her hardware and cut- 
lery, her nick-nacks and notions, will buy wheat not 
only in the marts of the West, but in Poland and 
Russia as well. She is sure to be fed, because she 
has wherewithal to buy food ; more sure to be fed 
than if she compelled the industry of her people to 
abandon the more profitable mill-stream and factory, 
shop, and foundry, to extort from these rocky hill-sides 
the reluctant grains. 

England, too, in 1849, removed the last vestige of 
corn-laws from her statute-book, and now imports 
flour freely from the Black Sea and from the Baltic, 
from France and from the United States. Who 
supposes that, if England did not raise a kernel of 
wheat, she would not be as certain of her daily 
bread as the people of Poland or of Michigan ? 
But one may say, in case of war, she had better 
raise her food at home. But it is absurd to suppose 
that any nation would be at war with all the world 
at once ; and we may be assured that the portion 
not belligerent would be eager to furnish the sup- 
plies. And besides, plenty of wheat would enter 
England if the English only wanted it, though all 
the navies of the world should blockade the fast- 
anchored isle. Every creek and headland would be 
alive with the silent and secret but busy agents of a 
clandestine trade. 



420 ELEMENTS OF POLITICAL ECONOMY. 

The simple consideration that condemns this sec- 
ond expedient of the Mercantile System, namely, 
the prohibiting the importation of such commod- 
ities as can be produced at home, and the Protective 
policy inseparably connected with it, is, that it in- 
volves a dead loss to the productive powers of the 
world. There is in the world a certain amount of 
capital and a certain amount of industry. These, 
if left to their own keen sense of interest, will make 
the aggregate amount of production in the world as 
great as that amount of capital and industry can 
make it. If, then, a free commerce distribute this 
aggregate production over the earth in accordance 
with the simple law of supply and demand, we shall 
have not only the greatest production, but the most 
perfect distribution. 

But if now government steps in, and withdraws 
capital and industry from their freely chosen posts 
of activity, prohibits exchanges that would otherwise 
be made, and commands commodities to be manu- 
factured or grown in localities where they would not 
naturally be manufactured or grown, then certainly 
the aggregate production of the world is lessened, 
and its distribution is less perfect. 

(3.) The Mercantile System had two other expe- 
dients which were frequently employed to subserve 
the ends of its grand principle. For the sake of 
increasing the exports, and thus improving the bal- 
ance of trade, bounties were given to encourage 
the export and sale of native fabrics in foreign 
markets. A bounty, we understand, is a sum of 
money paid outright by the government to the ex- 
porters of native fabrics, in order to enable them 



ON THE MERCANTILE SYSTEM. 421 

to sell their goods as cheap or cheaper than their 
rivals in the forei'gn market. England, for example, 
was so anxious to sell her goods to foreigners, that 
she regularly paid her merchants for selling the 
goods at a loss. " The price of these goods in that 
market," says the merchant, " will not reward my 
capital with the ordinary profit." " Never mind," 
says England, " sell away, and I will make up your 
loss by a bounty!" Was not that a rare and brill- 
iant way of enriching the country ? By natural 
laws, a branch of industry ceases as soon as it be- 
comes unprofitable ; but by the system of bounties 
a trade was perpetuated of which the expense was 
greater than the returns, of which every operation de- 
stroyed a portion of the capital employed in it. The 
loss was made up to the operators by government ; 
in other words, the people were taxed to pay it. 

(4.) The fourth and last expedient of the Mer- 
cantile System was to help the balance of trade by 
founding colonies, that the mother country might 
enjoy the monopoly of their trade, and force them 
to resort exclusively to her markets. All the English 
colonies on this continent were bound by the rigid 
fetters of this colonial system. Up to the date of 
American Independence, Virginia and Massachu- 
setts must buy all they wished to buy in English 
markets, and carry all they had to sell to English 
ports. Spain and France extended the same co- 
lonial monopoly, with even more of inflexibility, over 
their American and West India settlements ; and it 
was considerations growing out of this colonial 
policy which gave birth to the American Revolu- 
tion ; and that war was waged not more for the 
interests of humanity than for the freedom of trade. 



422 ELEMENTS OF POLITICAL ECONOMY. 



CHAPTER XV. 

ON AMERICAN TARIFFS. 

So long as the United States were colonies of 
Great Britain, their commerce was bound in the rigid 
fetters of the Mercantile System. We have already 
seen in the last chapter that colonies were one of the 
devices of the Mercantile System to secure a favor- 
able " balance of trade." If the maxim be to sell as 
much as possible and buy as little as possible, then 
colonies, which could be compelled to receive the 
goods of the mother country, must be commercially 
valuable. Accordingly, all the commercial countries 
of Europe, and particularly Spain and England, 
adopted a colonial policy that sprung directly from 
this fundamental maxim. They valued their colonies 
as affording broad markets for the sale of products,^ 
and also because they could monopolize the articles 
produced by the colonists themselves. In general, 
the colonists were compelled to sell all they had to 
sell to the mother country, and to buy all they had 
to buy of the mother country ; even though the arti- 
cles thus bought were not the produce of the mother 
country, but must first be imported there and then 
exported thence to the colonies. Until the Revolu- 
tion, a Boston ship, for example, could not sail di- 
rectly to China for teas, but the teas must first be 



ON AMERICAN TARIFFS. 423 

brought to England in British ships, must pay a 
duty there, and then be reexported to the colonies. 

As early as 1650 this monopoly system was en- 
tered upon by the then republican Parliament of 
England. The colonies had already overcome the 
difficulties incident to their first settlement, had 
begun to increase rapidly in wealth, and their com- 
merce had become so considerable as to afford a 
temptation to restiict its freedom and to endeavor 
to make it peculiarly advantageous to the mother 
country. In the year named an act was passed 
restricting the export and import trade of the colo- 
nies to British ships and to ships built in the colo- 
nies. No foreign keel could enter a colonial harbor, 
either to buy or to sell. 

Ten years later, that is in 1660, the famous " Nav- 
igation Act " was passed, which with small modifi- 
cations continued to be the maritime laAV of England 
down to 1815 ; which was essentially modified in 
1825 ; and the small remains of which have only 
recently been expunged from the statute-book. 

This Navigation Act is of great interest to Amer- 
icans, because the American Revolution grew directly 
out of it. Says Bancroft, " American Independence, 
like the great rivers of the country, had many sources; 
but the head spring which colored all the stream was 
the Navigation Act." It was enacted that certain 
enumerated articles, which included all the principal 
productions of the colonies, could not be exported 
directly to any foreign country, but must first be 
sent to Great Britain, and there unladen, before they 
could be forwarded to their final destination. It 
amounted to the same thing as prohibiting all exports 



424 ELEMENTS OF POLITICAL ECONOMY. 

except to the mother country. The chief products 
of their industry the colonists could not export to 
any place but Great Britain, not even to Ireland ; 
neither sugar, nor tobacco, nor cotton, nor wool, nor 
indigo, nor ginger, nor dye-woods, nor molasses, nor 
rice, nor peltry, nor ore, nor pitch, nor tar, nor turpen- 
tine, nor masts, nor yards, nor bowsprits, nor coffee, 
nor cocoa-nuts, nor whale-fins, nor hides, nor ashes. 

Nor was this all. England constituted herself not 
only the sole market for American products, but also 
the sole storehouse for American supplies. The 
colonies must not only sell exclusively in British 
markets, but they must also buy exclusively in Brit- 
ish markets. It was enacted, that " no commodity 
of the growth, production, or manufacture of Europe, 
shall be imported into the British plantations, but 
such as are laden and put on board in England, 
Wales, or Berwick-upon-Tweed, and in English- 
built shipping, whereof the master and three fourths 
of the crew are English." 

The preamble to this statute, which was supple- 
mental to the Navigation Act, is curious, and assigns 
as the motive of the restriction, " the maintaining a 
greater correspondence and kindness between the 
subjects at home and those in the plantations ; keep- 
ing the colonies in a firmer dependence on the 
mother country ; making them yet more beneficial 
to it in the further employment and increase of Eng- 
lish shipping and in the vent of English manufact- 
ures and commodities ; rendering the navigation to 
them more safe and cheap ; and making this kingdom 
a staple, not only of the commodities of the planta- 
tions, but also of the commodities of other countries 



ON AMERICAN TARIFFS. 425 

and places for their supply ; it being the usage of 
other nations to keep their plantation-trade exclu- 
sively to themselves." 

In close connection with these commercial restric- 
tions, it was a leading point in the colonial policy to 
discourage all attempts of the colonists to manufact- 
ure for themselves. " That the country which was 
the home of the beaver might not manufacture its 
own hats, no man in the colonies could be a hatter 
or a journeyman at that trade, unless he had served 
an apprenticeship of seven years. No hatter might 
employ more than two apprentices. No American 
hat might be sent from one plantation to another. 
America abounded in iron ores of the best quality, 
as well as in wood and coal ; slitting- mills, steel- 
furnaces, and plating-forges, to work with a tilt- 
hammer, were prohibited in the colonies as nui- 
sances." Similar restrictions existed in respect to 
wool and weaving; no v^'^ool, or any manufacture of 
it, could be carried across the line of one province to 
another ; and a British sailor, wanting clothes in a 
colonial harbor, was forbidden to buy there rtiore 
than forty shillings' worth. To print the English 
Bible in the colonies would have been a high-handed 
infringement of the law ; and while that book was 
reverently read around almost every hearthstone in 
the land, not a copy of it was printed here till we 
became an independent nation. 

So fully were British statesmen trammelled by the 
ideas of this colonial system, that Lord Chatham 
himself, the best friend the colonies had in England, 
did not hesitate to say from his place in Parliament 
that in a certain probable contingency, he would pro- 



426 ELEMENTS OF POLITICAL ECONOMY. 

hibit the colonists from manufacturing even a hob- 
nail or a horseshoe. And Lord Sheffield, at a later 
period, said, " The only use of American colonies is 
the mjonopoly of their consumption, and the carriage 
of their produce." 

From this degi-ading commercial vassalage the 
Revolution set us free. You wiU have observed that 
the economical consideration that condemns the co- 
lonial policy is, that it violates this sound commer- 
cial doctrine, namely, that men should buy in the 
cheapest market and sell in the dearest, wherever 
those markets are to be found. If the mother country 
finds it necessary to employ prohibitions to draw the 
colony-trade to herself, it proves that that trade, if 
left to itself, would have found other and more prof- 
itable channels. If Great Britain could have fur- 
nished us with all commodities as cheaply as we 
could procure them elsewhere, then there was no 
need of prohibitions and penalties — we should have 
gone to her of our own accord, as unerringly as the 
needle points to the pole. If she could not furnish 
us as cheaply as others, we were wronged — it was a 
tribute and a tax. She made us buy in a dearer 
market, when a cheaper one was open. 

So, if she could pay as much for our commodities 
as we could get for them elsewhere, there was no 
need of compelling us to sell to her ; we should, in 
that case, sell to her inevitably. If she would not 
give what we could get elsewhere, then we were 
wronged ; she made us sell in a cheaper market, 
when a dearer one was open. Her prohibitions then 
were either needless, or they were pernicious. 

But it may be said that our loss was her gain ; 



ON AMERICAN TARIFFS. 427 

that what we paid extra as consumers, was to them 
extra profit as manufacturers and merchants. But 
where is the justice of taxing one set of subjects or 
citizens for the benefit of another set of subjects or 
citizens ? And how is the wealth of the whole to be 
promoted by a transfer of gains from one part to 
another part? 

A deeper consideration condemns the colonial 
policy. Every country has certain advantages, 
which, if properly improved, enable that country to 
defy the competition of the world in certain branches 
of industry. If England could not sell as cheaply 
as others in the colonial ports, then she was employ- 
ing her capital and labor at home less profitably than 
she might have employed them ; for if she had em- 
ployed them upon those branches of production for 
which she had natural and acquired advantages, no 
nation could have undersold her ; and therefore, if a 
forced market in the colonies encouraged her to con- 
tinue branches of industry that would otherwise have 
been abandoned, it was a permanent loss to her own 
productive power. 

I do not believe that colonial monopolies ever 
enriched a mother country, on the whole. So perfect 
and compensating are economic laws, that the losses 
of one country can never contribute to the permanent 
gains of another. The highest commercial prosperity 
of one country implies and demands a corresponding 
prosperity in other countries. Commerce is ex- 
change. The richer your neighbors are in all prod- 
ucts, the richer you will become by your dealings 
with them. England's hereditary jealousy of the 
prosperity of France has been as economically fool- 



428 ELEMENTS OF POLITICAL ECONOMY. 

ish as it has been bitter and persistent. It is true of 
the family of Commerce, as it is of the family of 
Christ, "If one member suffer, all the members suffer 
with it." 

A good commercial system was not one of the 
immediate fruits of the American Revolution. The 
first government established in this country, the gov- 
ernment of the Confederation, which lasted from 
1781 to 1789,i<.was not gifted by the people with the 
power " to regulate commerce." This was one of 
the reserved rights of the States, which immediately 
began to use it in accordance with their own views 
of their own interests. Each State laid its own 
tariff, and undertook to regulate its own trade. The 
results were most disastrous. Great Britain, seeing 
that, as a nation, we were helpless commercially, 
not only refused to negotiate a commercial treaty 
with us, but by an Order in Council, peremptorily 
excluded our ships from her West India possessions, 
between which and the United States there had 
grown up, partly through some relaxations in the 
Act of Navigation, and partly in violation of that 
Act, a large and most profitable trade. We were in 
no position to retaliate. As a nation, we had no 
power to exclude her ships, and thus force her to a 
position of reciprocity. The States passed various 
and conflicting laws. If Massachusetts, for example, 
laid a duty on certain goods, and Rhode Island did 
not, very little revenue would Massachusetts draw 
from that source ; the goods were imported into 
Rhode Island, and then smuggled across the border. 
Thirteen independent States regulating the com- 
merce of our seaboard, induced endless confusion, and 



ON AMERICAN TARIFFS. 429 

there was no power to remedy it. Our commerce, 
such as it was, was ruined. 

To consult upon a remedy for this state of things 
was the specific purpose of the meeting at Annapo- 
lis, in 1786. Alexander Hamilton was there as a 
delegate from New York. He persuaded the dele- 
gates to decline entering upon the subject of com- 
merce, inasmuch as it was connected with other 
great defects of the Confederation, to which their 
powers did not reach ; and drew up an Address to 
Congress to call another Convention, with ample 
powers to go over the whole ground, and to devise a 
system adequate to the exigences of the country. 

Thus was summoned the Federal Convention of 
1787, which framed the Constitution under which we 
live, and which gave to Congress, that is, the nation, 
the needful power "to regulate commerce." 

The new House of Representatives, under the 
Constitution, commenced at once to discuss and 
frame a uniform national tariff. It passed in 1789 ; 
and, with some modifications and additions passed 
in subsequent years, constituted what I shall call, for 
convenience, the Hamilton tariff. I name it so, be- 
cause Hamilton, as Secretary of the Treasury, made 
an elaborate Report to Congress on the subject, and 
the tariff, as finally adjusted, bore in almost every 
part the impress of his moulding hand. This tariff 
lasted for twenty-five years. It was very successful. 
It admitted the principle of protection, indeed, but 
mainly as subordinate to revenue, and rarely for its 
own sake, and the general rate of duties laid was 
very low. For instance, in the original bill as passed, 
cotton goods were charged 5 per cent., iron goods 



430 ELEMENTS OF POLITICAL ECONOMY. 

7^ per cent., and woollens 5 per cent. These du- 
ties were afterwards somewhat, but not largely, in- 
creased.i 

Now under this low tariff the revenue steadly in- 
creased, year by year. There was almost no fluctua- 
tion, but a steady annual growth of income from 

1790 to 1808, when the Embargo was laid, which, of 
course, interrupted everything. During these eighteen 
years, the revenue gradually rose from $4,000,000 in 

1791 to over $16,000,00a in 1808 ; and, what is of 
greater consequence, the ratio of income to popula- 
tion is still more striking. The revenue begun at the 
rate of about $1,000,000 to 1,000,000 of people, and 
steadily rose during the eighteen years to about 
$2,500,000 to 1,000,000 of people. 

If now we compare these eighteen years of a low 
revenue tariff with the eighteen years of the pro- 
tective tariff, from 1816, when the new system was 
entered upon, to 1832 when it was partially aban- 
doned again, we shall find, in the first place, great 
fluctuations in the second period, instead of the great 
steadiness of the first. Here it is, — $26,000,000 one 
year, $17,000,000 the next, $20,000,000 the next, 
$15,000,000 the next, $13,000,000 the next, $23,- 
000,000 another, $17,000,000 another. Thus it was, 
up and down, an irregular teeter. Not only no 
steady increase, but no steady diminution, — nothing 
steady about it. In reference to the population, the 
product of the new duties never rose higher than the 
old ratio of 1808, namely, $2,500,000 to 1,000,000 
of people, but sometimes sunk down to $750,000 to 
1,000,000 of people. Thus do facts and figures show, 

1 Hildretli's United States. 



ON AMERICAN TARIFFS. 431 

independent of irrefragable reasoning, that the earlier 
system was the wiser. 

But while I praise the Hamilton tariff, in compar- 
ison with those that came after it, I do not forget 
its defects. It borrowed from the old Navigation 
Act of England, and made unwise discriminations 
between foreign bottoms and American ships. Du- 
ties were 10 per cent, higher on goods imported in 
foreign ships. Tonnage was 6 cents per ton on 
American ships ; 30 cents per ton on ships Ameri- 
can-built but owned by foreigners ; and 50 cents per 
ton on all others. These discriminations have long 
since disappeared. It cannot be wise to put obsta- 
cles in the way of foreigners coming to our ports to 
trade. Neither do sound principles approve even the 
moderate margin yielded in this tariff to protection. 
The duties indeed were low, — they were scarcely a 
burden upon industry, — but neither on the other 
hand did they aid it. All above the best revenue 
figure was needless. If, with the great advantage of 
being able to escape the costs of transportation, 
together with the abundance of raw material, and 
the endless resources of agriculture, any branch of 
industry could not live without artificial help, then 
the proof is complete that it ought not to have been 
entered upon, and could not have been prosecuted, 
except at a permanent loss. 

Our second tariff, passed in 1816, I shall designate 
as the Calhoun tariff. Then first we entered upon 
the protective system as such ; and it is a curious 
instance of how times change and men change with 
them, that Mr, Calhoun, who afterwards became the 
champion of Free Trade, strenuously advocated this 



432 ELEMENTS OF POLITICAL ECONOMY. 

tariff, while Mr. Webster as strenuously opposed it. 
Till then the tariff question formed no element in 
our politics ; if I may say so, nobody knew that we 
had any tariff unless he chanced to read the statute- 
book ; and it was an evil day for this country when 
a purely scientific question became mixed up in 
passions and politics, and adhesion, on one side or 
the other, to what not one voter in a thousand ever 
begun to comprehend, was made a test of party. 
From that day to this, no tariff question has ever 
been decided on its merits. Interests, sections, 
passions, have influenced every bill ; and it is a part 
of the punishment, I believe, for prosecuting an arti- 
ficial and false system in any department, that it is 
hard work to get out of it. New England generally 
opposed the Calhoun tariff, and the principle of pro- 
tection embodied in it; so did a majority of the 
Southern members; but South Carolina, seeing the 
growing value of cotton, and anxious for a home 
market for the raw material, united with Pennsyl- 
vania and the Middle States in securing the high 
duties, especially upon cottons and iron. The duties 
were increased, on an average, 42 per cent, above 
the old rates preceding the war. Imported articles 
were divided into three classes : 1st, Those of which 
a full domestic supply could be produced ; 2d, 
Those of which only a partial domestic supply could 
be afforded ; and 3d, Those produced at home 
very slightly, or not at all. On the first class, the 
duties were fixed substantially at 35 per cent, ad 
valorem. On the second class, including cottons and 
woollens, the duties were 25 per cent., to be reduced 
after three years to 20 per cent. On the third class 



ON AMERICAN TARIFFS. 433 

the rates were mostly fixed with a view to revenue 
only. 

In connection with the tariff, we copied again, and 
more largely, from the English Navigation Act. Im- 
portations by foreign ships were limited to the prod- 
uce of their respective countries ; and the coasting- 
trade, hitherto open to foreign vessels, was now re- 
stricted to those American owned and built. In one 
word, we entered fairly and squarely upon the career 
of restriction. 

Our third tariff, that of 1824, we may call, if we 
please, the Clay tariff That gentleman, though 
Speaker of the House at the time, took an earnest 
part in the debates, and was regarded as the most 
prominent advocate of what then first began to be 
called the " American System," that is, the system 
of high protective duties. Mr. Webster still opposed 
this S3'stem, made an elaborate speech in reply to 
Mr. Clay, and voted against the bill. 

The bill increased the duties on protected articles 
very considerably ; and is an excellent proof that 
interests that are petted, and legislatively protected, 
do not long remain satisfied with what 'they receive, 
but are soon clamorous for more protection. The 
Calhoun tariff gave these interests large protection ; 
eight years run on, and they call for more ; they get 
it. Are they satisfied ? Why should they be ? In- 
stead of being taught to rely upon themselves, they 
have been taught to lean upon the government. Cer- 
tainly they will ask for more still. 

Four years after the Clay tariff, that is in 1828, was 
passed the '' Tariff of Abominations," so called, in 
the politics of the time. The manufacturers of 

28 



434 ELEMENTS OF POLITICAL ECONOMY. 

course had asked for more protection ; but the oppo- 
sition to the system was now strong ; it could not 
prevent the passage of the bill, but it loaded it down 
with all manner of objectionable features, to make it 
as distasteful as possible to its advocates. A political 
design to make the protective system unpopular 
appeared, and was indeed avowed ; but the friends 
of protection, in view of the higher duties on many 
articles, came to the conclusion to support the bill 
notwithstanding its odious features. They swal- 
lowed the whole with the best grace they could. 
Daniel Webster, after strenuous but fruitless ejBTorts 
to reduce its " abominations," for the first time in his 
life voted for a bill involving the principle of high pro- 
tective duties. This was in John Quincy Adams's 
administration. 

Four years later Mr. Clay went into the Presi- 
dential canvass against General Jackson upon the 
avowed platform of protective duties. He was 
beaten. The country seemed to indicate its prefer- 
ence for another system; and accordingly in 1833 our 
fifth tariff, called the " Compromise tariff," became 
a law. It adopted a sliding scale in reference to all 
duties that were over 20 per cent., providing for their 
gradual reduction on each alternate year, till 1842, 
when and thereafter the uniform rate on all these 
goods should be 20 per cent, on the home valuation. 
Mr. Clay himself brought forward this bill as a "com- 
promise ; " it was approved by Mr. Calhoun, and it 
passed both Houses by decided majorities. 

During the next nine years the attention of the 
country was occupied by the great questions of a 
National Bank and the currency. On these and other 



ON AMERICAN TARIFFS. 435 

questions the administration of Van Buren became 
unpopular and broke down ; and the Whig party, 
coming into power, passed what I shall call the 
" Whig tariff" of 1842. It was a high protective 
tariff. The average of duties was perhaps 50 per 
cent., instead of the 20 per cent, of its predecessor. 
Under it, millions of capital were seduced into manu- 
factures, particularly of iron ; and when the high 
duties were abolished, as they were a few years later, 
hundreds and thousands of persons were pecuniarily 
ruined. It is impossible to speak in terms sufficiently 
deprecatory of an artificial system that inveigles 
capital and laborers into branches of industry in 
which they never would have embarked of their own 
accord. Our whole course of legislation on this sub- 
ject cannot be properly characterized in terms of 
respect. Congress has alternately inflated, and then 
punctured, the bubble. Nothing injures commerce so 
much as to tinker it. A constant changing of the 
terms on which foreigners are permitted to trade with 
us disgusts them and injures us. Even a bad tariff 
persisted in, is a good deal better than a series of 
good and bad ones together. 

In 1846 was passed what we will call the " Walker 
tariff," from Robert J. Walker, then Secretary of the 
Treasury. It reduced the duties on imports down to 
about the standard of the " Compromise " of 1833. 
It discriminated however, as the Compromise did not, 
between goo^is that could be produced at home and 
those that could not. It approached, in short, more 
nearly than any other, in its principles and details, to 
the Hamilton tariff, although the general rate of 
duties was higher. From that time up to 1857, there 



436 ELEMENTS OF POLITICAL ECONOMY. 

was a regular and large Increase in the amount of 
dutiable goods imported, bringing in a larger revenue 
to the government. The surplus in the treasury 
accumulated, and large sums were expended by the 
government in buying up its own bonds at a high 
premium, for the sake of emptying the treasury. 
Under these circumstances the "tariff of 1857" was 
passed, decidedly lowering the rates of duties, and 
largely increasing the free list. The financial crisis 
of that year diminished the imports, and the reve- 
nue fell oft" $22,000,000. It rallied, however, the 
next two years, but owing to the large increase in 
the free list, not quite up to the old point. 

It only remains to speak of the " Morrill tarifl"" of 
1861. It is the ninth in order, and our present tariff. 
The difficulties growing out of the war ostensibly 
united all parties in the view of obtaining, if possible, 
more revenue to the government ; but there was no 
agreement as to the means by which more revenue 
could be obtained ; and the protectionists in Congi'ess 
seized the opportunity of the withdraw ment of the 
Southern members for discriminating in favor of the 
articles in which they were interested, even to the 
extent of diminishing the revenue by practically pro- 
hibiting the importation. They did another thing 
which imposed at the time on many people, and 
which can hardly be characterized in too severe terms. 
At the moment when the great need of the govern- 
ment was revenue, they added largely to the free list, 
taking care to put upon it many articles which are 
used in manufactures, and which thus escape taxation 
altogether. They put the duty on protected articles 
so high that little or no revenue is received on them, 



ON AMERICAN TARIFFS. 437 

and at the same time withdrew, by means of the free 
list, all revenue from many articles especially used in 
protected manufactures. The new tariff therefore 
has not produced the revenue expected from it. It 
is not honestly adjusted for that purpose. To put 
articles on a free list is no boon to free trade ; espe- 
cially when it is accompanied, as in this case, by very 
high duties. The present duties are very much too 
high, and many things are exempted from duty 
which ought to pay duty for the sake of revenue. 
The present tariff therefore rests on false principles 
throughout, and it cannot be permanent. They who 
feel themselves benefited by it may as well make up 
their minds to dispense with it. The Western States 
will not tolerate it. Political Economy denounces it. 
To relax commercial systems and not to restrict them 
is alone in accordance with the spirit of this age. 
The state of the country demands its abolition. The 
claims of the public debt require a larger revenue 
from customs. ^8^^000,000 were received in thea^O, 
year closing on the 1st of July, 1865. We may well 
receive ^125,000,000 from a tariff which is framed in 
accordance with the true principles of exchange. In 
18!)1 the ratio of free goods imported to dutiable 
goods was as 33 to 100, $71,130,351 free and $218,- 
180,191 dutiable; and in 1862, the ratio was as 40 
to 100, $52,721,648 free and $136,683,123 dutiable ; 
instead of this there should be a low revenue duty 
upon the entire imports ; and this would doubtless 
have doubled or trebled the revenue of those years. 
The idea of protection and the idea of taxation are 
very distinct ideas ; and a recommendation to aban- 
don the one by no means carries along with it a 
recommendation to abandon the other. 



438 ELEMENTS OF POLITICAL ECONOMY. 



CHAPTER XVI. 

ON TAXATION. 

If the general views maintained throughout this 
book are conceded to be correct, we shall now reach 
with very little difficulty the true principles of taxa- 
tion. Value resides in services exchanged; and since 
government is an essential prerequisite to any general 
and satisfactory exchanges, since it contributes by 
direct effort to the security of person and property, 
it justly claims from every citizen in return a com- 
pensation for the service thus rendered to him. I 
do not mean to say that government exists solely for 
the protection of person and property, or that all the 
operations of government are to be brought down 
within the sphere of exchange ; government exists 
as well for the improvement as for the protection of 
society, and many of its high functions are moral, to 
be performed under a lofty sense of responsibility to 
God and to future ages; but the matter of taxation, 
by which government is outwardly supported, and 
by which it takes to itself a part of the gains of every 
man's industry, seems to me to find a ready and 
solid justification in the common principles of ex- 
change. A tax paid is a reward for a service ren- 
dered; and because the service may have respected 
another generation as well as the present, it is some- 



ON TAXATION. 439 

times proper that the tax also shall be passed over 
in part to another generation to pay. The services 
which government renders to production by its laws, 
courts, and officers, by the force which it is at all 
times ready to exert in behalf of any citizen or the 
whole society when threatened with evil, are rendered 
somewhat on the principle of division of labor, one 
set of agents devoting themselves to that woiM ; and, 
notwithstanding some crying abuses of authority 
which no constitution or public virtue have yet been 
found adequate wholly to avert, are rendered on the 
whole economically and satisfactorily. Taxes, there- 
fore, demanded of citizens by a lawful government 
which tolerably performs its functions, are legitimate 
and just on principles of exchange alone. 

The questions now arise, in what proportions shall 
the citizens contribute to the fund necessary to be 
raised by taxation? And in what manner shall these 
contributions be paid? 

The common notion has been that, since every 
man's person is supposed to be equally protected by 
the government, a uniform poll-tax assessed on all 
citizens alike is right, and that for the rest, a man 
should be taxed according to his property. But what 
is property ? No word has received a greater variety 
of definitions, or is less settled in definite meaning 
in the minds of men. The lawyers make a distinc- 
tion between real property and personal property ; 
and the law at present, though a man have neither 
real estate nor movables, yet taxes him on his income, 
on the rewards of his daily industry, regarding that 
as a species of property. And this too is just; be- 
cause, as I think, the ultimate idea of property is the 



440 ELEMENTS OF POLITICAL ECONOMY. 

power and right to render services in exchange. 
Robinson Crusoe, while solitary upon his island, did 
not and could not have property, in the true sense 
of that word. It is not the fact of appropriation that 
makes anything property ; it is not the fact that a 
man has made it or transformed it, that makes any- 
thing property ; it is not the fact that a man may 
rightfufty give it away, that makes anything prop- 
erty ; but it is the fact that a man has something, no 
matter what it is, for which something else may be 
obtained in exchange, that makes that something 
property, and gives government the right to tax it. 
In other words, property consists in values, in a pur- 
chasing-power, and not in possession, or in appropri- 
ation, or in the esteem in which a man holds any- 
thing he has as long as it is his own. The test of 
property is a sale ; that which will bring something 
when exposed for exchange is property ; that which 
will bring nothing, either never was, or has now 
ceased to be, distinctively property. This view may 
not seem to be as novel as it is, or it may be preju- 
diced by its very novelty, but at any rate it carries 
along with it that strongest of the criteria of truth, 
that it simplifies and illumines a confused section of 
the field of human thinking ; and at the same time 
justifies a practice which governments have reached, 
as it were through instinct, but which is continually 
a subject of cavil and complaint, the practice, name- 
ly, of taxing men who have neither real estate nor 
chattels, on their incomes from industry. Within a 
month an intelligent man was heard to inveigh 
against the injustice of the law which taxes the in- 
dustrious man who works and gains an income, but 



ON TAXATION. 441 

takes little or nothing from the man unable or too 

'lazy to work. Nevertheless the law is right in its 

action, and my neighbor was wrong in his strictures. 

To the general question, then, in what projDortions 
shall the citizens contribute in taxes to the support 
of government, the general answer comes, that they 
ought to contribute in accordance with the value of 
the services which they either do or might render to 
their fellow-citizens. Under the expression " might 
render" is not included any personal services not 
actually rendered, but only those forms of material 
property which might be exchanged for other forms 
if the owner saw fit to exchange them, but which he 
prefers for the present to keep in his own possession. 
It would not be fair, for example, to tax a profes- 
sional man on services which his neighbors, or any 
other authority, think he might render, were he less 
indolent or more capable ; but it is fair to tax any 
man on those forms of material property in his pos- 
session with which he may at any time he chooses 
render services in exchange. The right to tax on the 
part of the government is connected with the right to 
exchange on the part of the citizens, grows out of 
this, and is limited by it. This consideration, though 
it may exclude the propriety of a poll-tax, is consist- 
ent with all other forms of taxation, and gives unity 
to them. 

I do not think that the common sense of mankind 
falls in with the opinion ably advocated by Mr. Mill 
and others, that persons of a large property or of a 
large income should pay taxes higher than the due 
proportion of their properties or incomes to more 
moderate properties or incomes. The transaction 



442 ELEMENTS OF POLITICAL ECONOMY. 

between the government and a tax-payer is itself a 
kind of exchange, and if the ground of it be, as 1 
think it is, that government facilitates by way of pro- 
tection all his other exchanges, then ought he to pay 
taxes proportion ably to the amount of his exchanges 
actual or possible; and a man should pay on an 
income of |10,000 ten times as much, and no more, 
as a man with an income of $1000. Mr. Mill re- 
gards equality of burden as the true general princi- 
ple of taxation; and as a rich man can pay more 
than his proportional share with perhaps less sacrifice 
than the poor man, therefore he ought to pay more 
than his proportional share. This principle is em- 
bodied in the present United States law by which 
incomes are taxed ; incomes over $600 and less 
than $5000 being subject to 5 per cent, tax, and the 
surplus income over $5000 being subject to a 10 
per cent. tax. It may well be questioned whether 
the principle itself, and consequently this application 
of it, be soundly based. Certainly taxes ought to 
be laid on equal and equitable principles, but the 
difficulty of determining for different classes of citi- 
zens what would be an equality of burden is so 
insuperably great, that one hesitates before accepting 
it as the true principle of taxation. On the whole, 
I am clear that the best available guide in practical 
taxation are these simple principles, that property is 
essentially a power to render services, and that tax- 
ation should be as nearly as possible proportionate 
to the degree of this power. 

If, then, taxes are to be laid on services, thus sub- 
tracting a portion from the gains which accompany 
them, the question now arises in what way are they 



ON TAXATION. 443 

to be laid ? They are commonly divided into two 
classes, direct and indirect. A direct tax is levied 
on the very persons who are expected themselves to 
pay it; an indirect tax is demanded from one person 
in the expectation that he will pay it provisionally, 
but will indemnify himself in the higher price which 
he will receive from the ultimate consumer. Thus 
an income tax is direct, while duties laid on imported 
goods are indirect. There has been a great amount 
of discussion on the point whether direct or indirect 
taxation be the more eligible form ; but the reader 
of penetration will perceive that there is not at bot- 
tom any very radical difference between them ; each 
is alike a tax on actual or possible exchanges, with 
this main difference, that men pay indirect taxes as 
a part of the price of the goods they buy, without 
thinking perhaps that it is a tax they are paying, and 
consequently without any of the repugnance that is 
sometimes felt towards a tax-gatherer who comes 
with an unwelcome demand. Thus indirect taxes 
are conveniently and economically collected. Espe- 
cially is this true of impost duties ; since one set of 
custom-house officers collect easily and at once the 
government tax which is ultimately paid by con- 
sumers all over the country. The manufacturers' 
tax, the tax on keeping horses and carriages to let, 
and very many others levied by the present United 
States internal revenue law, are indirect taxes, where- 
by the government gets in a lump what is afterwards 
distributed over many subordinate exchanges. The 
countervailing disadvantage of indirect taxation, how- 
ever, is, that the price of the commodity is usually 
enhanced to an extent much beyond the amount of 



444 ELEMENTS OF POLITICAL ECONOMY. 

the tax, partly because it is a cover under which 
dealers may put an unreasonable demand, and partly 
because the tax, having to be advanced over and 
over again by the intermediate dealers, profits rapidly 
accumulate as an element of the price. 

Direct taxes are laid either on income or expendi- 
ture. An income tax, if the exact amount of income 
could in all cases be ascertained, would be a perfectly 
unexceptionable form of taxation. The only sources 
of income are three : wages, profits, rents. I do not 
think that gifts are legitimately taxable ; they lie out- 
side the field of exchange ; they spring from sympa- 
thy, from benevolence, from duty ; and while ex- 
change must claim all that fairly belongs to it, it 
must be careful not to throw discouragements into 
the adjacent but distinct field of morals. Hence, it 
may well be questioned whether legacies, bequeath- 
ments, gifts to charitable and educational institu- 
tions, and gifts to individuals proceeding from friend- 
ship, gratitude, or other such impulse, are properly 
subject to taxation. The property is taxable in the 
hands of the donor, and may be in the hands of the 
recipient, but the passage from one to the other ought 
to be unobstructed by a tax. Gifts then excepted, 
and plunder, which is out of the question, the sources 
of income are few and simple, and there is no great 
difficulty in every man's ascertaining about what his 
annual income is. Fraudulent returns should be 
promptly punished by an additional assessment and 
collection. The income law at present in force in 
the United States has perhaps been subject to less 
complaint than the manufacturers' tax, and other 
forms of indirect taxation ; and it is becoming more 



ON TAXATION. 445 

and more productive every year, as the forms are per- 
fected, and as the memory and conscience of the pay- 
ers are quickened by the action of a healthful public 
opinion brought to bear through the very proper 
annual publication of the list of their returns. 

The other direct taxes are on expenditure of some 
special kinds, such as those on horses, carriages, 
watches, plate, and so on, kept for personal use. As 
the difficulty of a tax on a person's whole expenditure 
is much greater than one on his whole income, inas- 
much as the items are more numerous and more 
diffused, it is only attempted to lay a few taxes on 
some peculiar items of expenditure, such as those 
above mentioned ; but as these do not reach all per- 
sons with any degree of equality, they are so far 
forth objectionable. A house -tax, levied on the 
occupier, and not on the owner unless he be at the 
same time the occupier, would be a direct tax on 
expenditure every way unobjectionable.^ Taking 
society at large, the house a man lives in and its 
furniture are probably the most accurate index attain- 
able of the size of his general expenditures. They 
are open to observation and current remark ; they are 
that on which persons rely more perhaps than on 
anything else external for their consideration and 
station in life ; the tax could be assessed with very 
little trouble on the part of the assessor ; and it is 
well worthy the attention of our national legislature, 
whether such a tax, if more taxes should be needed, 
would not be more equal and more easy of collection 
than any others now open ; or whether it might not 
with advantage take the place of some of the com- 

1 Mill, Chap. III., Book 5. 



446 ELEMENTS OF POLITICAL ECONOMY. 

plicated and objectionable taxes now laid. Direct 
taxes have this general advantage over indirect, that 
they bring the people into more immediate contact 
with the government that lays the taxes, and subject 
it to a quicker supervision and more effectual curb, 
whenever its expenditures grow larger than the peo- 
ple think it desirable to incur; they have this general 
disadvantage over indirect taxes, especially over im- 
posts, that the number of officials required to assess 
and collect them is much larger, thus swallowing up 
a part of the proceeds of the taxes, with this liabil- 
ity also of bringing the people into an attitude of 
hostility to the government and to its contemplated 
expenditures. But whether the taxes be direct or 
indirect, or whatever be their form, except it be a poll- 
tax, which is questionable at best, they are laid upon 
exchanges, and are designed to withdraw for the use 
of the government a part of the gains of exchanges. 
From this point of view, which gives unity to the 
whole field of taxation, some practical hints may 
usefully conclude this discussion and this volume. 

(1.) Taxes in general, in order to be most pro- 
ductive in the long run, as well as discourage as little 
as possible the exchanges which would otherwise go 
forward, ought to be low relatively to the amount of 
values exchangeable. A high tax not infrequently 
stops exchanges in the taxed articles altogether, and 
of course the tax then realizes nothing to the govern- 
ment. As the only motive to an exchange is the 
gain of it, the exchange ceases whenever the govern- 
ment cuts so deeply into the gain as to leave little 
margin to the exchangers. The greater the gain left 
to the parties, after the tax is abstracted, the more 



ON TAXATION. 447 

numerous will the exchanges become, and the greater 
the nnmber of times will the tax fall into the coffers 
of the government. In almost all articles, consump- 
tion increases from a lowered price in even a greater 
ratio than the diminution of the rate of tax ; so that 
the interests of consumers and of the revenue are 
not antagonistic but harmonious. Particularly is 
this true of duties on imported goods : I do not know 
as there is anything imported, except what the gov- 
ernment itself imports, which should not pay a 
small duty. It is a tax on exchange, like all other 
taxes; why should it not be paid on everything? A 
free list in imports is of doubtful utility at best, and 
may become, as the Morrill tariff demonstrates, little 
better than a swindle. On articles of luxury and 
ostentation, and on those, such as liquors and to- 
baccos, whose moral effects are clearly questionable, 
very high taxes may properly enough be laid, because 
their incidence will hardly tend to diminish consump- 
tion, and it would scarcely be to be regretted if it 
did ; but with this exception, duties and taxes should 
be levied at a low rate per cent, as well for the in- 
terest of revenue as of consumers. 

(2.) Duties and taxes should be simple, and their 
amount easily calculable by the payer beforehand. 
The complication of specific duties with ad valorem 
duties upon the same articles is a decided objection 
to the present tariff. So far as is possible, taxes 
should be levied upon commodities once for all, and 
then an end. The opposite principle of taxing com- 
modities every time they change hands throws an 
indefinite burden on exchange, whose weight cannot 
well be calculated beforehand, either by the consumer 



448 ELEMENTS OF POLITICAL ECONOMY. 

or by the government, through uncertainty as to the 
number of transfers. Exchanges indeed are the only 
legitimate subject of taxation, but not every specific 
and subordinate exchange. An attempt to tax all 
sales whatever vv^as follovi^ed in Spain, and will be 
followed everywhere, by a sluggish indisposition to 
trade at all. Let the amount of the tax be definite, and 
let everybody be sure that when it is once paid gov- 
ernment will produce no further claim, and industry 
will go along under heavy taxes better than under 
those nominally lighter to which uncertainty as to 
time or amount attaches. All the more advanced 
governments have been simplifying of late years 
their systems of taxation, and collecting their revenue 
at fewer points, and under more tangible conditions, 
in order to interfere as little as possible with a free 
industry and free exchange. England, for instance, 
has given up a great variety of taxes which she used 
to impose, and now collects her revenue about as 
follows : — 

Customs, 35 per cent. Stamps, 10 per cent. 

Excise, 25 per cent. Miscellaneous, 1 per cent. 

Taxes, 20 per cent. 

(3.) Taxes and duties should be collected by the 
government in as economical a manner as possible, 
that is to say, the money should be kept out of the 
pockets of the people as short a time as possible, 
disbursement following quick upon collection. It is 
poor policy to gather taxes at the beginning of the 
year which will not be disbursed till the end of the 
year. Let the people use their funds till they are 
wanted at the treasury ; and if the taxes do not then 
come in as fast as wanted, it is better to issue what 



ON TAXATION. 449 

are called in England exchequer-bills, and in the 
United States certificates of indebtedness, to be re- 
deemed at the end of the year from the proceeds of 
the taxes, than to let the people's money lie idle in 
the treasury. 

(4.) If the necessities of the State require it, gov- 
ernment has the right to demand from all persons 
who are capable of making exchanges, and who do 
make them, something in the form of taxes. But it 
is every way better, when possible, that people of 
very moderate means should be exempted altogether 
from direct taxes ; and the payment of indirect taxes 
is a matter wholly in their own option, since they are 
at liberty to buy much or little of those commodities 
subjected to an indirect tax. In this country at pres- 
ent, incomes not exceeding $600 are exempted by 
the law. If a house-tax should be levied, all houses 
below a certain grade of style and comfort should be 
exempted, and the tax pass up by easy gradations 
from those just taxed to the palatial residences of 
the rich. In the present age of the world, the well-to- 
do citizens of every country are able to bear without 
too great difficulty the burdens of the government ; 
and nothing tests better the degree of civilization 
which a nation has reached than the care and solici- 
tude it displays for the welfare of its poorer citizens. 

29 



THE END. 



LIBRARY OF CONGRESS 




013 476 481 8 




